How the euro-crisis could affect your investments

With the financial world on the brink of another massive crisis, Merryn Somerset Webb looks at what the nightmare across the Channel could mean for some of her favourite investment themes.

I have written hundreds of columns over the past five years, and suggested all manner of different investment ideas. But those that get the most comments are the ones on the subjects that I keep coming back to: the gold price, UK property prices, Japan and solid dividend-paying global stocks, aka the New Nifty Fifty.

So, as the financial world appears to be falling on our heads this week, I thought I would amuse you by returning to all of them, and wondering what the nightmare across the Channel means for them.

First up, our national obsession: house prices. Some people think that house prices haven't crashed in the UK. They're wrong. Prices are actually down 25-30% in inflation-adjusted terms and show every sign of continuing their descent to some kind of fair value (except for prices in central London). Total transactions fell sharply in October, according to the LSL Acadametrics House Price Index, and are now down 6% year on year. Mortgage lenders remain closed to the non-rich. Note that in October this year, just 1% of loans for house purchases went to those with a deposit of 10% or less. In 2007, that number was 13%. Whatever the bulls might say, this period of very low interest rates and high lender forbearance (banks aren't foreclosing) is all that's keeping the market alive at the moment.

What difference might Europe make to that? Another banking crisis would restrict credit even further and push up its price. In October, the average interest rate on a two-year fixed-rate mortgage rose from 2.92% to 3.04%. This week, Yorkshire and Barnsley building societies both pushed up their rates. If things get worse in Italy, everywhere else will, too. And the higher mortgage rates go, the lower house prices will go. It isn't making me want to get into the buy-to-let market much.

Next, gold. I've been tipping this for a decade. Back in the early 2000s, I did so because it looked like cheap insurance against the beginnings of a nasty credit bubble. It isn't so cheap now. But it still has insurance value. Holding gold the world's only independent currency gives you some protection against the incompetence and idiocy of Europe's bickering politicians. So keep it.

I'd also keep holding cash. Yes, inflation nibbles around its edges in an increasingly irritating fashion, but it still gives you what strategists call "optionality". If the euro does fall apart, or if no new bail-out plan appears very soon, there'll be a nasty deflationary shock, one that will eventually give you the chance of a lifetime to load up on cheap assets. That's worth being ready for.

Over in Japan, of course, the market is already cheap. Several commentators have made a connection between Europe and Japan suggesting that the market's treatment of the likes of Greece and Italy is nothing compared to what will happen when Japan goes bust. However, the comparison makes little sense. Japan may be very deeply in debt but, unlike the struggling eurozone countries, it is perfectly capable of dealing with those debts with relatively little bother. Note that it still has its own currency, it has no debt ceiling and that it has a current account surplus. Note too that its net debt is half its gross debt: the government still owns Japan Post, 50% of Japan Tobacco and 33% of NTT among many other things.

There is also huge scope for increasing tax revenues in Japan. Consumption tax is a mere 5%. Doubling it to 10% wouldn't be hard. Nor would getting in more corporation tax. CLSA points out that, thanks to a system where small companies are endlessly "mollycoddled", 75% of Japanese companies pay no tax at all. Investors have a lot to worry about, but I don't think their holdings in Japan are among them. Some tweaks to the tax system, a raised retirement age and a few asset sales and Japan will be just fine.

Next up, the big companies that everyone thinks will grow regardless of what happens next. These make me a tad more nervous. Europe will get one of three things: a break-up leading to a systemic banking crisis and a global recession; or a commitment to an impossible level of austerity followed by recession and civil unrest; or a round of ECB-driven money creation and sovereign bond-buying that will make the UK's extraordinary QE programme look like my children's pocket money.

I'm assuming it will be the third (see last week's column), but either of the first two wouldn't do anyone any good no matter how much exposure to emerging markets they have. Let's not forget, just as one example, that the exporters paying the wages of the emerging Chinese middle classes still count Europe among their main markets.

Still, as I said a few weeks ago, shares in these global companies aren't expensive and they have some momentum. All that makes them a better equity bet than anything else in the west for now. So I'd keep holding a fund that picks them well perhaps the Murray International Trust.

This article was first published in the Financial Times

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