MoneyWeek roundup: The moment the markets were dreading

This week, the moment that the markets had spent most of the year living in terror of, finally arrived.

The taper began.

And yet, as John Stepek noted in Thursday’s Money Morning, while the market “went into fits of panic” at the hit of tapering in May, they “surged” when Ben Bernanke actually pulled the trigger.

That may be primarily because, despite Bernanke’s move, “short-term interest rates in every major developed economy are below 1%, and the biggest economy in the world is still printing $75bn a month to buy its own debt”.

And more to the point, he also did his level best to reassure investors that interest rates would be nailed to the floor for as long as it took – the vague unemployment target of 6.5% the Fed had previously mentioned was tossed aside.

So for now, “markets see this as the ‘Goldilocks’ taper”. Not too hot, not too cold.

However, “like it or not, this is a move in the direction of tightening, not loosening”.  And with US stocks already looking expensive, without QE (quantitative easing), “there’s nothing to keep them going up.” While he doesn’t see a crash necessarily, stocks do “need to get cheaper”.

But in the longer run, a bigger risk is that, “that the Fed won’t tighten quickly enough and our next crisis will be inflationary”.

Enough of that though. The good news is that “if you’ve been reading Money Morning for the past year or so,” the taper news doesn’t have much impact on your portfolio.

“Stick with cheap markets where money-printing is ongoing… have a bit of gold“ to diversify your portfolio, and “take a look at index-linked bonds, but avoid most conventional ones”.

John particularly likes Japan: “there’s still a surprising amount of scepticism out there… when a market has been ground down for literally decades, the bears die hard”. And that slow process is a key ingredient for long bull market.

Our experts talk about Japan and the impact of the taper in the Roundtable discussion in this week’s MoneyWeek magazine. If you’re not already a subscriber, get your first three issues free here.

Ed’s six big predictions

My colleague Ed Bowsher is a Japan bull too. One of his forecasts for 2014 is that the Nikkei index will rise “by at least 10% next year, taking it to well over 17,000” – just remember to hedge your yen exposure.

Ed also expects the Bank of England to raise interest rates in 2014 – if the UK economy is genuinely recovering as employment data suggest, then inflation is likely to take off. So he reckons a nervy Mark Carney will have given us a “0.75% base rate by next Christmas”.

Meanwhile, the eurozone will have the opposite problem. The threat of deflation will finally spur the European Central Bank into quantitative easing or more aggressive money pumping, one way or the other. That’ll be good for eurozone shares.

Read the rest of Ed’s predictions, including why he thinks Ed Balls is for the chop.

Don’t panic about the taper

Dr Mike Tubbs isn’t phased by the taper. He reckons “an environment of decent growth and low rates awaits”. And as far as he’s concerned, that’s great news for the sorts of stocks he picks for his Research Investments newsletter – companies that invest a lot of money in research and development, and staying ahead of the competition.

You see, R&D investment “drives continual improvement in their products and services”. And many of Mike’s “companies also have big growth drivers – such as major new drug approvals or expansion plans.” This will “create growth irrespective of the Fed”. These companies have shown genuine growth, not just QE-inflated asset prices.

However, Mike’s not being complacent – he plans to do a big review of the portfolio in early 2014. He’s also planning to “look back at some of our ‘sold’ companies – to see if any could now be re-recommended”. So, now’s the perfect time to check out his newsletter if you’re not already on board – you can find out more about it here. 

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Christmas is here – what better time of year to think about tax?

Christmas is a time for giving gifts. However, our editor-in-chief, Merryn Somerset Webb, just wants to remind you that you could be left with a large tax bill if you’re too generous.

“Let’s say you want to give a grandchild a nice painting, one that’s been hanging in your house for generations. If it is worth under £6,000, you can do so with no bother”.

However, if it’s more expensive, “you will need to pay capital gains tax on that rise in value in exactly the same way you would have had to, had you sold it to a stranger”.

Worse, “if you die within seven years, it could also be included as part of your estate for inheritance tax purposes”. Naturally, “the same goes for any gifts to partners or girlfriends”.

The one exception is if you are married, where “you can give anything you like to each other tax-free. However, “hand a nice piece of inherited jewellery over to a partner you are not in an official partnership with and the tax hit is the same – capital gains is payable”.

Non-doms also need to watch out. While you can give “give gifts to adult friends and children without any trouble”, any gifts to “spouses, co-habitees and minor children or grandchildren” are counted as remitting income or gains to the UK. As a result your will be liable for taxes. While this may not be very seasonal, this proves that “there is almost no such thing as an untaxed transaction in the UK”.

However, while reader Mr Clyde agrees that the piece is “factually correct”, he argues that gifting a chattel “has to be done sometime and if there are CGT allowances to be used up, sooner is probably better than later”.

He also suggests that for “for larger disposals Deeds of Trust can be used to transfer shares in an object to any number of people in any proportion”. Overall, “there are plenty of ways of creating untaxed transactions in the UK”.

Why you could be poorer than your parents

Sticking with a cheery festive theme in The Right Side this week, Bengt Saelensminde took a look at a report recently published by the Institute for Fiscal Studies (IFS), which suggested that many people living today (especially those born in the ‘60s and ‘70s) could end up poorer than their parents.

There are five factors that “have served to whip the rug out from under the feet of many in my generation”. The first big negative is the changes to private pensions. Even as late as the 1990s, “a decent pension scheme was still on the cards”. However, by the end of the decade, “many businesses were beginning to realise that these commitments were unaffordable.”

This is compounded by a second problem – falling interest rates: right now, if you want to receive an index-linked income of £30,000 a year in retirement, “you’ll need to have saved a pension pot of £1m”. This “is not within easy reach for most people”.

Pay restraint is another issue. While globalisation and technology “have definitely brought some improvements”, they have “also had the effect of keeping wages in check”. So “just at the point when people need to save more, they’ve stopped earning more money”.

Fourthly, rising housing costs, in the form of soaring property prices, “has been a great benefit to the already-retireds”. However, it also means that “those in the younger generations have to spend more and more money on housing”.

Finally, there’s the inheritance – or lack of it. Many people who are about to retire “will be pinning their hopes on a decent inheritance”. However, “the already-retireds are living much longer than the generation before them”.

What’s more, “it is now expected that family wealth (even if it’s tied up in property) should be used to finance care of the elderly”, which “may not leave much (if anything) in the pot for future generations”.

At the end of the day, most of these factors are “unavoidable” since “you cannot have a society living longer, and not expect to have to pay for it”. (And isn’t it basically a good thing, after all, that we’re living longer?)

So as a result we need “a diligent savings culture alongside the acceptance of working longer”. The bad news is that our current solution – “punting all the wealth on a property bubble” – is “not sustainable”.

This could be one of the biggest stories of 2014 – check it out now

One thing that could help a lot with our economic problems in the UK is a US-style fracking boom.

America still has its problems, for sure – like us, it’s got too much government debt and although the Fed is starting to taper, it’s going to be a hell of a job to unwind all that without causing serious volatility.

But North Dakota – the US fracking heartland – has avoided all of the doom and gloom that hit the rest of the US. It’s quite staggering. In 2012, the state’s economy grew at five times the rate of the rest of America as a whole – an incredible 13.4%. That was also three times the rate of the second-placed state, Texas. And it was the fastest-growing state for the third year in a row.

Now, North Dakota is tiny in economic terms (it has a population of about 700,000 people), so you can’t compare it directly to the UK. But it does show you some of the huge impact that fracking has had.

And the government is keen to encourage something similar in the UK. I wrote about this last month for MoneyWeek subscribers, but if you’re not already a subscriber, you can read a free report on the topic from our Fleet Street Letter writers here.

This could be one of the biggest British investment and economic stories of 2014 – make sure you stay on top of it.

Have a great Christmas and New Year, and here’s to a profitable 2014 for us all!

• Dr Mike Tubbs’ Research Investments and The Fleet Street Letter are regulated products issued by Fleet Street Publications Ltd.

To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.

Have a great weekend!

The MoneyWeek team
Merryn Somerset Webb
John Stepek
Matthew Partridge
Ed Bowsher
David Stevenson

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