Do you have the guts for this "hard trade"?

Great news if you followed up on last Friday's trade.

Today the FTSE has hit its 30-day moving average. That means it's time to close out your trade if you haven't already. And you should be looking at 180spread betting profit points or thereabouts. Well done if you were successful here - let me know how you got on.

If you weren't in on this, don't worry. I see plenty more great trades lining up. In fact, today I want to get you ready for another trade that could have even more profit potential...

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Our win on theFTSE 100 trade was all about having the guts to buy when the market looked ugly. We bought when everyone else was running. Mentally, it was a hard trade to do, but we've been rewarded for our courage.

To make the most of 'hard trades' you need to make mental preparation.

Today I want to start that preparation for what I think could be one of the best trades we're likely to see over the coming years. It's also one of the hardest. Bigger, bolder and potentially better than anything I've described before.

There's a market that's starting to look really ugly. In the months ahead it could get absolutely smashed - and that's going to throw up some true bargains that I want to get my hands on.

That's why I want you to get prepared for it now. Let me show you what I'm thinking.

Get ready for the next market meltdown

As you've probably seen, on Wednesday night the Portuguese Prime Minister Jos Scrates was forced to resign from office. Parliament wasn't prepared to stand behind his plans for more austerity. The politicians have had enough. The public's had enough - and now the financial markets seem to have had enough of all of them.

And Portuguese stocks are now right at the top of my shopping list.

I've got a rule of thumb - when something's trading on a p/e of under ten, it's generally cheap. Not always, but it's worth looking into.

So when I see Portugal's stock market trading at undersix times earnings, my antennae prick up. These are Portugal's top businesses and they're going for a song. Are things really that bad?

Well actually, sadly in this case the answer is yes. In fact, things could go downhill from here. So it's not time to start buying Portugal yet.

Don't buy yet - wait for dirt cheap'

Portugal owes a load of money borrowed through government bonds, some due for redemption in April. It might not have the cash to repay these liabilities. That's why the ratings agencies have been downgrading Portugal's debt again.

The Portuguese are about to find themselves with a choice:

Either find some way of cracking on with cutting back the state and its expenditure. Then get a loan from the IMF to settle the bonds for immediate repayment. Then accept decades of austerity, gradually paying down this extraordinary debt pile.

Or hard ball their creditors. Renege on debt - or maybe restructure it - perhaps only pay back half of its face value and with no interest.

If I were a Portuguese citizen, I know which way I'd be voting. The government is bankrupt. They have little in the way of assets and they have a lot in the way of liabilities.

If you are bankrupt, you should have the right to re-negotiate with creditors. Whether you're an individual or a business and you're bust, you don't take a massive new loan that will shackle you and your kids with debts for decades to come. No: you either renegotiate the debt, or you go bust and start again with a clean slate.

The Portuguese should look to Iceland as an example of how to deal with this.

Iceland took the 'stuff the creditors' approach and it seems to be working out all right. Financial markets can be vicious, but they rarely harbour a grudge. The international community hasn't thrown Iceland into the wilderness just because it had the temerity to call the bluff of creditors.

And just look at serial bad debtors like the countries of Latin America - debts get written off and then the cycle starts again.

Why take the Irish route? Why do you want to burden society with debts that could go on for 50 years!

What happens if Portugal takes the stuff you' approach?

Now there's a question we need to be prepared for.

Will they get slung out of the euro? Probably. Will they set up a 'new euro' along with some other defaulters, or go back to a floating escudo?

Who knows - but whatever happens, it's going to be ugly for her financial markets.

Let's say for argument's sake that whatever currency they end up with, it's going to be worth around a third less than the euro. That means that anyone holding Portuguese paper (shares, bonds, anything) will suddenly find their investments devalued by a third.

But here's the thing: this is exactly what Portugal needs. It's what is going to lift her back out of the abyss.

Invest when things turn really ugly, then take the long view

That's exactly what happened when sterling got kicked out of the European Exchange Rate Mechanism in 1992. The ERM was the front-runner to the euro - the idea was that Europeancurrencies should gradually coalesce to become the euro. Mercifully we got kicked out and we never got back in.

Bang... immediate devaluation of sterling. And that's exactly what we needed. During the nineties exports rose on the back of a cheaper pound, and our labour got more competitive. Sure, it didn't feel good at the time. But hindsight shows what great news this was.

And it will undoubtedly be the same for Portugal. But if Portugal gets kicked out of the euro, there'll be chaos. The markets will be in turmoil. Investors will be taking short-term decisions based on immediate concerns.

Businesses and individuals with euro debts will suddenly find it's going to cost them a third more to repay these liabilities! Things will look bad.

The Portuguesestock market will likely get crushed. Nobody will want to touch it. Not unless they're tough enough to place the "hard trade". And that's what I'm looking to do...

I'm on the hunt for ways to play this

If you're up for this, I want you to get mentally prepared. If you know how bad it's going to look in the immediate aftermath, you'll be one step ahead of other investors. That's when you should be hunting around for bargains,while others dump them. That's the time to do the hard trade.

And you should be taking the long-view on this one - five to ten years after the collapse, things will undoubtedly look very different.

The Portuguese have 52 days before they can vote in a new parliament. There will be a tough decision to make. Pay the debt, or re-structure it. I hope they take the 'stuff them' approach to creditors.

If they do, things could unravel quickly - so you need to be ready to move. You need to know what to buy - and you need to have the funds to buy it. Maybe you've taken my advice and you're sitting on a bit of cash ready for action.

I'm already on the look out for some ways to get exposure. Let me know if you have any ideas, too.

And don't be tempted in too soon. Sure, Portuguese stocks look cheap today; but be patient. Hang on until they're dirt-cheap. That's the time to buy.

This article was first published in the free investment email The Right side. Sign up to TheRightSide here.

Important Information

Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798 https://www.fsa.gov.uk/register/home.do