MoneyWeek roundup: What’s worrying Mr Market?
James McKeigue highlights the week's best pieces from the MoneyWeek team, including: what's given the market the jitters; profit as China cleans up; and how banks fool investors.
After all the hubris of the American election campaign the reaction to Obama's victory was rather muted. As one pundit put it: "We spent $2bn and still have the same president. The Republicans still control Congress and the Senate is still with the Democrats." The market reaction was less indifferent, with America's Dow Jones index suffering its worst fall of the year.
In Thursday's Money Morning John Stepek explained why the index fell.
It's all down to the short attention span of Mr Market', says John.
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"Prior to the US election, Mr Market was fretting over who would win. Mitt Romney would arguably have been friendlier to businesses in terms of tax policies. But there was also a fear that he'd have been a hard money' kind of guy. For a market hooked on quantitative easing (QE), that was a worrying prospect.
Now Obama's back in, the market doesn't have to worry about QE suddenly being withdrawn. But nothing else has changed. So now the focus has shifted to all the other things left to worry about."
Why is Mr Market so concerned?
"For starters, there's that 'fiscal cliff' problem everyone keeps talking about", says John. "In case you weren't already aware, a package of tax hikes and spending cuts is due to take effect at the start of next year. If the full package is put in place, it'll suck a load of money out of the US economy. Chances are that would hit the economy hard.
Given that almost nothing has changed in the make-up of the American leadership, attempts to reach a compromise will boil down to how co-operative the two sides of the government feel."
The other big worry is Europe. The latest data suggests that the German economy is starting to slow. If the Germans were to succumb to recession then it would be difficult to see how it could fund bailouts. In the end the European Central Bank will have to print money, says John. "But expect more crisis' headlines and summits before then."
To top it all off China has also been struggling recently. "It's anyone's guess what will happen when the handover of power is finished there. But with shadows hanging over both the US and European economies, it's hard to believe that China can reignite economic growth easily when demand in the rest of the globe is so weak."
Make no mistake, these are challenging times for investors. But you can mitigate the risk by buying cheap assets. "We ran through our latest views on various asset classes in a recent issue of MoneyWeek magazine. If you're not a subscriber, subscribe to MoneyWeek magazine."
How to play Britain's shale gas revolution
It's not all bad news. In last week's edition of The Fleet Street Letter, David Stevenson outlined an exciting new investment trend.
It will come as no surprise of most of you to here that David is excited by the prospects for gas. Most of us here at MoneyWeek have written articles on the investment potential of natural gas - a plentiful fuel that's cleaner than coal and cheaper than oil. We've also explained how new drilling techniques have opened up huge reserves of shale gas in America. But David is not just keen on natural gas. He is convinced that the shale gas revolution is about to come to the UK.
"Over the next decade, Britain could be facing a serious power generation shortfall", says David. "As ever, expert opinions vary on how big this might be. But the government is now about to publish its Energy Bill. This will explain how officialdom will encourage earlier-than-planned investment to cope with a mounting electricity crisis in this country."
Meanwhile the government is also encouraging energy utilities to build more gas-fired plants.
And with Britain's North Sea gas reserves rapidly declining, David believes the government will turn to fracking' for shale gas to boost domestic supply.
"After all, there's plenty of shale gas potential over here", says David. "The most recent report by the British Geological Survey (BGS) estimated UK onshore shale gas reserves at 5.3 trillion cubic feet (tcf). At Britain's current gas usage rate of 3.5 tcf a year, that would meet our needs for 1 years.
"But the UK's overall shale gas figures could turn out to be a whole lot higher. Cuadrilla Resources reckons the Bowland formation alone, which spans the Isle of Man to North Wales, South Cumbria and the East Midlands, could contain as much as 200 trillion cubic feet of shale gas.
"Indeed, Britain expects to issue a new BGS estimate of its shale gas resources in the Bowland formation before the end of 2012. And next year there will be a more comprehensive figure for the whole country."
In other words, Britain's shale gas sector could be about to take off in a big way. Of course spotting trends is all very well but the point of The Fleet Street Letter is to help people make money from them. David's done just that and found an exciting British company that should do well if the UK turns to shale gas.
If I gave that tip away here for free neither David nor his subscribers would be too pleased. However, one thing I can let you see is his latest investment report. In it he explains how you can double the income you get from a share without spending a penny more. It's well worth a watch so click here.
China's massive water challenge
Another newsletter writer who thinks he's spotted an emerging investment trend is Penny Sleuth writer Tom Bulford.
"Many in China are beginning to take a stand against poor public services and a government that tries to sweep things under the carpet", writes Tom.
In particular they're worried about food.
"There have been a number of Chinese food scares in recent years. Cases have ranged from dairy products contaminated with melamine that killed eight babies in 2008; rice flour contaminated with heavy metals; arsenic-laced soy sauce; watermelons that explode due to the influence of growth promoting chemicals; the use of bleach in mushrooms to make them appear fresher; and finally a story that I mentioned last year, the use of borax to make pork look like more expensive beef."
An even bigger problem is the quality of the country's potable water. "Last year China's second national water assessment reported that 35% of the country's drinking water' is in fact not drinkable. Thanks to the country's rapid industrialisation, the water is contaminated at source. And water purification methods are outdated and by the time the water has travelled through corroded pipes it has all the ingredients to deliver a nasty stomach pain."
Understandably the Chinese people aren't too happy about this. After all, what's the point of a country getting richer if you don't have access to basic life essentials such as clean drinking water?
For China's ruling classes it's an issue that will have to be carefully managed if they're to keep the people happy. And for certain companies it's a massive investment opportunity.
Indeed Tom thinks he's found one in particular that looks well placed to benefit.
The thing is purifying water isn't rocket science. The ancient Greeks did it by storing water in silver jugs. More modern methods involve boiling water or treating it with ultra-violet radiation. But Tom has found a company with a new purification technique that's far cheaper than its competitors. That makes it far more likely to take off in China.
If you want to find out more about this company, you can read all about the company and the technology behind its water purifier in the latest issue of Tom's other newsletter, Red Hot Penny Shares.
If you are not already a subscriber, you have the chance to sign up for free for a 90-day no obligation trial.
How to make money in ageing Britain
Before I go, a quick nod to one of the most popular articles on our website. It's no secret that, thanks to a demographic bulge, the average age of Britain's population is expected to tick steadily upwards over the next few years. On Monday Merryn Somerset Webb examined the investment implications.
"It is increasingly clear that trend GDP growth rates are strongly influenced by how many people of any particular age live in any one country", says Merryn.
Take Britain, for example. "Births in the UK rose by 15% between 1946 and 1970 compared with the previous five years. This gave us an extra three million babies. That was nice for families, but it was also brilliant for the economy."
When those babies grew up they triggered "the growth supercycle' of 1982 to 2007: the period in which they reached their peak spending age range (46 is the average top spending age) and the one in which the credit markets developed to make sure they had the cash to make the most of it."
That helped drive the economy forward. The trouble now, says Merryn, is that "despite my generation of working mothers doing our best to keep things going, we no longer have large groups of the young. Births between 1971 and 2000 were 17% lower. The result is that over-55s are now the only growth cohort in the UK."
To back up her point Merryn looks at Japan, whose birth cycle is slightly ahead' of the UK's. "Japan's Boomers hit the peak wealth creating age between 1977 and 1994. The Nikkei peaked in 1989 with government bond yields at 8% and growth at 4%. It has been around 1% since - regardless of the government's stimulus efforts."
Convinced that the same is happening here in Britain, Merryn examines some of the best ways to invest your money. It's a fascinating take on an irrevocable demographic change so click hereto read the piece in full.
How banks pull the wool over your eyes
As always I'd like to end the roundup with a nod to my colleague Tim Bennett's latest video tutorial. This week Tim investigates the murky world of loan loss provision accounting in banks. It sounds dull but it matters a lot. Tim breaks down how it works and explains why investors must not be duped by firms that play the rules to their advantage.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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Have a great weekend!
John Stepek
Tim Bennett
James McKeigue
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ.
James has worked as a freelance journalist in various Latin American countries. He also had a spell at ITV, as well as writing for Television Business International and covering the European equity markets for the Forbes.com London bureau.
James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report.
He founded LatAm INVESTOR, the UK's only Latin American-focused investment magazine.
He is currently the Business Editor at Compass Media.