Two risky newcomers head for the FTSE 100

***Two risky newcomers head for the FTSE 100 ***The new housing problem - there's too many of them ***RECOMMENDED ARTICLES: How the US government is cooking the books... Why gold's bull run has just begun...

***Two risky newcomers head for the FTSE 100

***The new housing problem - there's too many of them

***RECOMMENDED ARTICLES: How the US government is cooking the books... Why gold's bull run has just begun...

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

We think it's safe to say that investors who put their money into a FTSE 100 tracker fund aren't looking for investment thrills and spills.

So it was little surprise that flavour-of-the-minute poker stock PartyGaming caused a bit of a stir when it leaped into the blue-chip index in October.

But PartyGaming is a positively tame investment compared to the latest recruit to the FTSE 100's ranks. Investors in trackers might be a little concerned to note that they are about to put a dollop of their money into a company whose sole assets are located in a dictatorship in the former Soviet Union...

Kazakhmys is one of the stocks set to enter the UK's blue-chip FTSE 100 index later this month, after the quarterly reshuffle. The copper miner is based in Kazakhstan, a former Soviet Republic, probably currently best-known for threatening to sue Ali G' comedian Sasha Baron Cohen over his somewhat blunt satirical take on the country. As John Plender in the FT argued earlier this week, the company is "scarcely standard FTSE stuff."

Don't get us wrong. We're not necessarily saying that Kazakhmys is a bad company to invest in. It has a lower p/e rating than Chile-based Antofagasta, the other FTSE 100 copper miner, and Barclays reckon the two have similar risk profiles.

But you do have to realise that it is very risky indeed. Kazakhstan is a comparatively stable ex-Soviet Union country. But that really isn't saying very much, given that its neighbours Kyrgyzstan and the Ukraine have both suffered revolutions (bloodless ones, thankfully) in recent years.

It's also a play almost exclusively on the copper price. Opinions are very much divided on copper at the moment, with the water muddied by the furore over China's "rogue" copper trader Liu Qibing. At MoneyWeek we're long-term bulls on commodities, but every bull market has its corrections, and with copper still trading near all-time highs, it could well be due one.

It's yet another reason why passive, or tracker investing isn't the low-risk haven it's often cracked up to be. And some people (including us) would argue that the other stock set to join the big leagues, housebuilder Persimmon, isn't exactly low-risk either.

The property pundits are starting to put together their house price forecasts for 2006. Nationwide reckons prices will rise by 0%-3% over the next year. This would almost certainly mean prices falling in real terms, considering that inflation is currently well above the Bank of England's 2% target, and likely to stay there for the foreseeable future.

Of course, the company says the usual estate agent-y things like "at the end of 2005, a crash hadn't occurred" and that the market "seems to have achieved a soft landing." But the fact that it can't muster up a more upbeat prediction for next year than a flat market doesn't bode well for house prices - or the people who sell them.

And if you look more closely at the figures, the market for new homes is already in considerable trouble. According to, prices for new homes were down 4.8% year-on-year during November, while prices for flats have dropped by 15% since 2003 due to "oversupply".

And as we mentioned earlier this week, Portman building society is now refusing to offer buy-to-let mortgages on new-build properties - again because the market is suffering from oversupply.

The Chancellor's pre-Budget report also made life significantly tougher for housebuilders. Scrapping tax advantages for residential property in Sipps has yanked a prop from under the buy-to-let market. And his plans to stick a tax on development land can only make life more inconvenient and expensive for companies in the sector.

All in all, UK housebuilders probably face at least as much political risk as Kazakh copper miners. You think we're exaggerating? Just last week Canadian oil explorer Nexen said it was reconsidering its projects in the North Sea in the wake of Gordon Brown's oil tax hike. To quote: 'The deterioration of fiscal terms in the UK and the frequency of these changes could impact our future investment decisions.'

This company has exploration wells off the shore of West Africa, hardly a low risk environment. And yet it's effectively saying that the UK tax regime is too volatile to make further investments worth the risk. At least Kazakhstan, as a developing economy, has some incentive to try to keep its foreign investors happy.

So Persimmon and Kazakhmys are both high-risk stocks. But only one company is selling something that has a fighting chance of going up in price over the next year.

We'll leave it to you to figure out which that could be...

The FTSE 100 closed 13 points lower at 5,517. Oil heavyweight BP slipped 2% to 640p as the Kuwaiti Government sold 185m shares in the group.

Over in continental Europe, the German Dax Xetra edged 4 points down to close at 5,282, while the Paris Cac 40 slipped 8 to 4,661.

Across the Atlantic, US stocks made gains as oil prices eased up and an early reading of consumer confidence data for December was better than hoped. The Dow Jones rose 23 points to 10,778, the S&P 500 gained 4 to 1,259, and the tech-heavy Nasdaq rose 10 to 2,256.

In Asian trading hours, oil was mixed, trading at around $59.80 a barrel in New York, while Brent crude fell back to trade at around $56.

Meanwhile, spot gold set yet another fresh high, climbing to more than $538 an ounce, a level not seen since March 1981. Silver also hit its highest level since May 1987, reaching over $9.10 an ounce.

In Asian stock markets, the Nikkei 225 surged 334 points to 15,738. A government report showed that Japanese households became less pessimistic in November for the second month in a row, as wages rise and job prospects improve.

And in the UK, there's excitement in the building sector. Construction group Balfour Beatty has said it may make a rival bid for Mowlem, which has already agreed to a £291m takeover from Carillion.

And our two recommended articles for today...

How the US government is cooking the books

- The US government has spent more than it pulls in from taxes in 45 of the last 50 years, says Bert McLachlan, writing for the Ludwig von Mises Institute. President Bush has promised to cut the budget deficit in half by 2009 - but Washington's arithmetic is somewhat different to everyone else's. To find out why the deficit cuts aren't quite as extensive as they seem, see: How the US government is cooking the books.

Why gold's bull run has just begun

- Some have argued that gold's bull market started as early as 2001, says Paul van Eeden in his weekly commentary. But he believes it has only just begun. To find out why, and to learn why 'if ever there was a time to buy gold, it is now', see: Why gold's bull run has just begun.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.