MoneyWeek roundup: If there’s trouble, here’s where it will come from

The New Year is traditionally a time to take stock and look ahead, so it’s no surprise that several MoneyWeek writers have been writing about prospects for 2014.

And the good news is that they’re all pretty bullish about stocks and shares.

David Thornton is perhaps the most bullish in his Penny Sleuth email. He argues that “stocks with defensive characteristics and high yields” have been prized in recent years, but with confidence now rising, we’re heading into “the perfect environment for penny shares.”

David is especially excited by the prospects for small technology companies:

“Although many growing tech companies need money to support their ambitions, they tend not to need as much capital as resources companies or manufacturers. Technology-based businesses also tend to have high margins, and their cost structure means profits can explode if a product really takes off.”

His favourite tech sectors are biotech and ‘big data.’ The big data phenomenon has really taken off in the last two years as nearly all of us are creating daily data trails. Every time we use a mobile phone or tablet, we reveal our location, and we give away plenty more information when we shop online or post on social media sites.

With so much data now being created, sophisticated analysis can spot previously hidden correlations. David cites Google Flu Trends, which “uses data from internet searches to make accurate real time predictions of the progression of the flu in your area.”

David thinks that big tech-giants such as IBM and SAP will benefit from this investment trend, but suspects that some smaller companies with “dedicated exposure” could deliver the biggest returns.

Japan and the eurozone

Meanwhile, John Stepek is still “pretty optimistic” about stocks and shares especially in the markets that MoneyWeek has been recommending, such as Japan and the eurozone.

John reckons we’re still some way off from the moment of capitulation when all the bears have become bulls: “There’s sufficient scepticism out there on stocks – particularly in markets that are still cheap – to make me think that are plenty more buyers waiting to be converted.”

However, John is far from optimistic when it comes to the bond market.

He sees several signs of “over-exuberance” in the bond market including a dramatic increase in “covenant-lite” loans. These loans, which carry less protection for lenders, accounted for 25% of loans sold in 2007. In 2013, they accounted for almost 60%. That’s a worrying rise.

Covenant-lite loans aren’t the only type of “rubbish” being readily bought, and John thinks the reason is a shortage of supply. Central banks are buying up government bonds which means that the “high quality stuff that investors would normally be buying simply isn’t there.”

Trouble is, the US has started to scale back its bond purchases which means that more “safe stuff” will gradually become available to buy again, probably at higher yields.

That could make all the junk look “very expensive indeed by comparision.”


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Cutting back on bonds

In his free Right Side email, Bengt Saelensminde is also positive on equities and pretty negative on bonds.

He’s increasing his equities weighting for 2014 from 30% of his portfolio to 35%. At the same time, he’s reducing his weighting for bonds from 20% to 15%.

You might think that a 35% exposure to equities is on the low side, but Bengt also has a 30% exposure to commodities and much of that exposure “comes by way of equities in specialist funds and mining stocks.”

Google

And as a final piece of bullishness for the week, I wrote a positive piece about Google. The tech giant is now valued at a huge $370bn but I reckon there could be further gains to come.

On the downside, the company has missed out on the rapid rise of social networking on the web. Indeed, Google chairman Eric Schmidt, admitted this week that his failure to spot the potential of social networking had been his biggest mistake at the company.

But regardless of that mistake, I’m convinced that Google will retain its position as the dominant player in internet advertising. As long as that happens, the current valuation won’t be unreasonable. I’m going to hang onto my shares.

Welfare to workers

Moving on from predictions for 2014, our editor-in-chief, Merryn Somerset Webb, highlights the benefits that many full-time workers receive.

Look at this example: “Say you are working a 35-hour week and earning £250 a week. Your gross income from working is around £12,900 a year… But if you are part of a couple with two children, various benefits will top that up by another £11,927.

“You’ll get working tax credit (£1,970), child tax credit (£5,976), housing benefit (£2,205) and of course, child benefit (£1,752.)”

So basically, the government makes it easy for employers to pay very low wages by providing benefit subsidies. This has serious implications for the whole debate over working migrants.

Granted, many working migrants may work hard in full-time jobs, but they’re still costing the country money thanks to subsidies.

Whether that matters depends “which numbers you believe on the long-term benefits – or lack of – as a result of immigration.”

This article is taken from our FREE daily investment email Money Morning.
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Have a great weekend!

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

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