There were 391,000 cancer diagnoses in the UK alone in 2019, according to Macmillan Cancer Support. 

There is therefore huge demand for better ways to diagnose cancer as fast as possible. The cancer diagnosis market is already worth an estimated $135bn, and is expected “to exceed $250bn by 2030”, says Maximilian Martin, global head of philanthropy at Lombard Odier. 

Ageing populations in developed countries and greater access to treatment in emerging markets are driving demand. On the supply side, recent progress has “opened up vast possibilities”.

From sick care to healthcare 

Creaking healthcare systems around the world are realising that they will need to take a big step away from “reactive treatment toward targeted, preventative medicine”, says Luke Barrs, global head of fundamental equity client portfolio management at Goldman Sachs’ Asset Management. 

Elena Viboch, partner at venture capital firm General Catalyst, agrees that there needs to “be a move from sick care to health care”. When it comes to cancer, catching the disease at an earlier stage enables “higher survival rates, less costly treatments, and a situation where people’s quality of life can be maintained for longer”, says Viboch. 

While the resulting delays and waiting lists in the UK affect everyone, they are “particularly critical for cancer patients, who are receiving diagnoses far later and struggling to access treatment before their condition worsens as a result”. 

Ovid Amadi, senior analyst at RTW Investments says, a better diagnosis “can also help doctors gauge which stage the cancer has reached (there are four stages, with stage one being the mildest) and find any particular mutations, which can in turn help “match the right treatment to the right patient”. 

The best technology can now detect the return of malignancy between ten and 12 months sooner than previously, notes Amadi.

The potential in blood tests 

Perhaps the most promising research involves cancer-detecting blood tests. Detecting one type of cancer through drawing blood is impressive enough, but the ultimate goal is a test that can detect multiple types of cancer (known as an MCED) “so that you can go to the doctor each year for a simple blood test that will tell you if you have cancer or not”, says Amadi. 

The problem is that accurately detecting multiple cancers and distinguishing between them, “so the doctors know which part of the body to search... to carry out follow-up tests”, is “exponentially more difficult than just detecting just one”. Still, that hasn’t stopped Illumina from developing Galleri, the first commercially available MCED. 

Imaging and artificial intelligence 

Advanced imaging systems, such as CT, MRI and ultrasound scans, are also frequently used to help diagnose cancer. However, while non-invasive, they have drawbacks. 

All three systems are extremely expensive, with most MRI machines “so large that up until now they have had to be located in hospital basements”, says Sackin. 

Developments in artificial intelligence (AI) and machine learning “also mean you can get the same image quality from a weaker signal”, allowing for even smaller and cheaper MRIs. These devices, then, should soon start playing an even greater role in detecting cancer. 

For example, AI “is already powering endoscopy systems by providing an enhanced visualisation to detect polyps better and earlier when performing colonoscopies,” says Sara Torrecilla, senior biotechnology analyst at asset manager Candriam.

As well as speeding up the process, it “can enhance diagnostic accuracy and detect subtle features that may be overlooked by human observers”. AI could also revolutionise big-data analysis when it comes to diagnosing cancer. 

Finally, AI algorithms “can provide prognostic information to guide treatment decisions by analysing clinical data and predicting patient outcomes and survival rates”.

What to buy now 

The main multi-cancer early detection (MCED) test at present is the highly promising Galleri test developed by Grail, which was bought by Illumina (Nasdaq: ILMN) in 2020. While the deal may need to be unwound owing to pressure from competition regulators, “there is the possibility that Grail may be spun out directly to Illumina’s shareholders, which means [they] may still be able to benefit”, says Julie Utterback, senior equity analyst at Morningstar. 

What’s more, Illumina’s legacy genomic-sequencing tools “remain a key building block of most liquid biopsy tests”, ensuring that the firm will benefit when such tests take off. 

Another risky investment involved in developing liquid biopsies is Exact Sciences (Nasdaq: EXAS). Its flagship product is Cologuard, an FDA-approved stool test that uses DNA markers to detect colon cancer. 

The leading developer of medical- imaging devices is Siemens Healthineers (Frankfurt: SHL), spun out of the German engineering firm Siemens in 2016. Siemens Healthineers is the pioneer of photon counting, which the US Food and Drug Administration called “the first major new technology for CT imaging in nearly a decade”. This provides “a greatly improved spatial resolution” . The upshot is that thanks to this new technology radiologists should be able “to identify smaller anatomical structures, detect and observe tumour development and potential metastasis, and evaluate if an injected therapy drug can pass into the tumour itself”, says Sara Torrecilla of Candriam. 

Intuitive Surgical (Nasdaq: ISRG) is known for its robot-assisted surgery. It recently released Ion, a flexible bronchoscopy system that is aimed at improving the diagnosis of lung cancer. By enabling the camera to get into parts of the lungs that are hard to reach, Ion can do away with the need for a more intrusive needle biopsy.

Over the past six months the Bank of England has hiked interest rates, but high street banks have not passed all of the increase on to savings accounts.

You can get about 4.5% for a one- or two-year fix (there isn’t much of a premium for a three- or five-year one right now), mostly from smaller banks and building societies such as Hampshire Trust Bank and Tandem.

The biggest high-street names offer a maximum of about 4%, such as Tesco Bank, TSB, Halifax and National Savings & Investment.

All UK-regulated banks and building societies have Financial Services Compensation Scheme (FSCS) protection for savings accounts, but this only covers amounts up to £85,000 per person per institution (not per account).

So if you have a large lump sum to save, you will need to chose providers more carefully.

Structured deposits

However, traditional deposits aren’t the only home for your cash – experienced investors could also look at structured deposits.

These are increasingly sold by firms who usually focus on riskier structured products, but are very different to their traditional offering.

In essence, they are deposits with major global banks – such as Société Générale, Barclays, Goldman Sachs or Royal Bank of Canada (RBC) – structured to provide a variety of returns.

The underlying deposits are still FSCS protected, but you can have variants that offer non-conditional, fixed interest, others that pay conditional interest that is linked to the level of a stock market index, or a combination of both.

Fixed-rate products may pay over 4% for three to five years, while the conditional deposits have the potential to target 6%-8% or more. There’s the opportunity to invest via an individual savings account (Isa), making returns tax-free.

Rising demand

Over the past six months, there’s been increasing demand for structured deposits, says Richard Harry, an independent financial adviser (IFA) who tracks the structured deposits market and sells direct (see bestpricefs.co.uk).

The most common products look like a fixed-income bond, but have a small “equity kicker” such as an extra 0.5% at maturity if, say, the FTSE 100 is higher, says Ian Lowes, another IFA who runs a review of the sector (see structuredproductreview.com).

One of the most successful products for both of them has been the IDAD Barclays Inflation-Linked Deposit Plan April 2023.

This provides a gross interest payment at maturity equal to the rise in the retail price index between January 2023 and January 2027, plus a potential additional 2% interest if the FTSE 100 closes at or above its initial level.

“To keep up with ‘real returns’ this is the only deposit in the UK structured deposit market that is shaped in this way,” says Harry.

This month, Tempo Structured Products, one of the major structured product providers, has entered the structured deposit market with a range of six structured products in conjunction with Société Générale and RBC.

These have varying degrees of stockmarket linkage – for example, one five-year deposit with RBC pays a core 2% interest rate plus the potential for bonus interest of 3.75% each year if the market doesn’t fall.

Tempo is championing the use of plain English and ensuring that its product literature is independently “crystal marked” as jargon free by the Plain English Campaign.

It uses the language of cash and savings products rather than more complex investment instruments – for example, by including details of annual effective rates (AER) for all its products, not just simple interest rates that are more commonly used for structured deposits.

This could make them easier to understand and accessible for people who are more familiar with savings than investments.

Attractive if rates come down

There must be a decent chance that central banks “pivot” at some point and rates will come down. If you think that scenario is likely, fixing an FSCS-backed structured deposit return via an Isa wrapper might make sense for some – though not all – savers and investors.

Even though the interest paid by structured deposits can be linked to stockmarkets, they offer full return of capital at maturity without any stockmarket risk – unlike traditional structured products.

That said, it is important to understand the terms of each product before investing. Note that there may not be a guaranteed right to cash in early if you need the money – and that doing so may mean that you get back less than you paid in. They are definitely not suitable for anybody who may require immediate access.

Gold is regarded as the ultimate protection against inflation. No wonder it’s in demand with investors now. The price of the precious metal, trading at around $1,670 an ounce at the end of October, could rise above $2,000 in the months to come according to some experts, including Goldman Sachs and Societe Generale. The popularity of accessible gold investments such as The Royal Mint’s Britannia gold bullion coins and bars is rising accordingly.

The argument for investing in gold during periods of high inflation is a longstanding one. Unlike cash, which central banks can increase the supply of as they see fit, gold is a physical entity that is in limited supply; it therefore holds its purchasing power when the money supply is increasing, and inflation is rising. Gold prices can fall in value as well as rise – and they do – but the investment has a good long-term track record of holding its value against other goods during periods of uncertainty.

With inflation in the UK currently at a 40-year high – and expected to rise even higher over the rest of 2022 – interest in gold is surging once again. All the more so since high inflation is not a UK-specific issue; most Western economies are also facing steep price rises.

In truth, there are good reasons to consider buying gold at any time; it can provide a stable core to a diversified portfolio of investments, helping you to spread risk and plan for the long term. How, then, to actually make such an investment in a safe and secure way, particularly with so many gold dealers advertising their services in a market that is not regulated by bodies such as the Financial Conduct Authority?

The Royal Mint, the official manufacturer of coins in the UK, is a reassuring option for many investors. The Royal Mint operates as a limited company – in fact, it’s the country’s oldest company – but it is wholly owned by the Treasury. The fact the UK Government stands behind the organisation means investors know they are dealing with a trustworthy counterparty selling legitimate gold.

The Royal Mint offers a number of gold bullion products – as well as investments in other precious metals such as silver and platinum – but is particularly well-known for its Britannia gold coins, minted using 24-carat gold with a fineness of 999.9. These are typically available in four different sizes, weighing one ounce, half an ounce, quarter of an ounce and one tenth of an ounce, and therefore provide an accessible and affordable way to buy high-quality gold.

One attraction of these coins for many investors is the long history and tradition of Britannia in British coinage. Britannia, the female representation of Britain, has been the face of The Royal Mint’s bullion coins since 1987, but first appeared on coins almost 2,000 years ago. Britannia featured on the coins of the Roman emperor Hadrian, in around AD 119, as the symbol of a new province and people, but was revived for the coinage of Charles II in 1672. She has appeared on the coins of every monarch since then.

The modern incarnation of Britannia coins was designed by the renowned sculptor and coin designer Philip Nathan, and a new range is introduced each year. The 2023 edition of the coin includes a number of advanced security features; The Royal Mint says these make the Britannia the most visually-secure bullion coin in the world. For example, the coins feature a latent image that changes from a padlock to Britannia’s famous trident, while Britannia’s shield bears the Union flag, which is accented with tincture lines.

Another popular option with investors buying from The Royal Mint is the Britannia gold bullion bar range. Designed by Jody Clark, the artist behind the fifth and final effigy of Queen Elizabeth II, which is in use on the UK’s coins, the bars also come in a range of different sizes, from one gram to one hundred grams. As with the Britannia coins, this ensures investors with different budgets have an opportunity to invest.

Each gold bar carries an individual serial number and is presented in a secure Britannia-branded blister pack. Many purchasers enjoy the bars as collectors’ items, as well as regarding them for their investment value.

The Royal Mint offers two options for investors who purchase gold from them. Some people choose to take delivery of their purchases, storing the gold as they see fit. The alternative is to store your gold in The Royal Mint’s own storage facility, known as The Vault®. Located in a secure site close to Cardiff, The Vault® charges an annual fee for storage, of around 1% of the value of your gold, plus VAT, but for your money, you get security and professional storage conditions.

Once you own Britannia gold coins or bars, their value on the secondary market will rise and fall as the price of gold fluctuates – if you want to realise this value, you can sell your holdings back to The Royal Mint, or through an independent gold dealer. Demand for individual coins and bars may rise or fall over time, meaning their value may not move exactly in line with the gold price, but this is nevertheless an excellent way to get exposure to the precious metal’s qualities as a long-term store of wealth.

• Find out more about investing in Britannia gold coins and bars here: royalmint.com/Britannia

Fears of recession “continue to grip commodity markets,” say Goldman Sachs’s analysts in a note. Yet “physical fundamentals signal some of the tightest markets in decades”.

Commodity prices surged earlier this year after Russia’s invasion of Ukraine, but many raw materials have since tumbled back to earth. The price of iron ore is down 36% from its March peak, while aluminium and copper have lost 19% and 20% respectively since 1 January. Wheat futures have returned to pre-invasion levels.

Despite this, the S&P GSCI index, which tracks the prices of 24 major raw materials, has still gained 12% since the start of the year because energy prices remain buoyant. The S&P GSCI Energy sub-index, which tracks global oil and gas prices, is up 23% since 1 January.

Supply squeeze could drive commodity prices down further

The prices of oil, metals and agricultural products could yet have further to fall, says Jeffrey Frankel for Project Syndicate. First, global growth – and thus demand for commodities – is being squeezed by China’s slowdown, US rate rises and Europe’s energy crunch. Second, real interest rates are on the rise. There is a “long-established” relationship between higher real rates and lower commodity prices, one reason being that higher rates cause “institutional investors to shift out of... commodities” and into alternatives, such as government bonds.

This summer’s commodity plunge has “reminded us that commodity investing is not for the faint-hearted”, says Tom Stevenson in The Daily Telegraph. Yet for all the current fears about recession, the “underlying driver” of commodity markets is physical supply and demand. Years of “underinvestment in the production of sufficient energy and other resources” mean that supplies of many raw materials are running short.

High energy costs are also squeezing the supply of some metals, says Étienne Goetz in Les Echos. European producers of zinc and aluminium have been forced to cut back production in response to record electricity prices. It takes nearly 15 megawatt hours (MWh) to produce a ton of aluminium, prompting some to joke that the metal is “nothing but solid electricity”.

China's reopening should bolster demand

Commodity prices may be close to a bottom, says Yuhao Fang for Capital Economics. A gradual reopening of China’s economy later this year, combined with a measure of fiscal stimulus, should bolster demand in the world’s most important commodity market. What’s more, “the supply shortages that pushed up prices earlier in the year have not gone away”.

Inventories are at “distressed levels and significantly below five-year averages” for most major commodities, agree James Luke, Malcolm Melville and Dravasp Jhabvala of Schroders. They note that “15% to 25% corrections” of the type experienced in recent months have occurred in previous commodity bull markets. In the long term, the green transition and other climate-change policies could mean we are heading for a “structural” bull market for metals, energy and agriculture, so it might be time to “buy the dip”.

South Korea is planning to close the “Korea discount”, says Joori Roh for Reuters. Companies in Asia’s fourth-biggest economy have lower valuations than comparable businesses in other markets because of “low dividend payouts” and the “dominance of opaque conglomerates known as chaebols”.

Foreign investors have long complained about onerous administrative requirements to trade in Seoul and a lack of corporate information in English. South Korean firms also “confirm dividend amounts weeks after the so-called ex-date” (the day a stock starts trading without the value of its next dividend), making it difficult for income investors to calculate their returns.

South Korea is still classified as an emerging market by index provider MSCI. Indeed, its stocks account for 11.5% of the MSCI Emerging Markets index, much to the chagrin of the country’s politicians. In June MSCI again declined to upgrade Seoul to developed-market status, says Dave Sebastian in The Wall Street Journal. Poor accessibility for global investors and tight curbs on short-selling are hampering the market. Seoul has taken steps to liberalise its currency market, but it will need to do much more to secure an upgrade by MSCI. That could trigger $44bn in foreign inflows into local stocks, says Goldman Sachs.

Local assets could do with a lift. The Kospi stock index is down 20% this year, while the won is at a 13-year low against the US dollar. The won’s fall has been driven by a trade deficit that reached a record high in August, says Sam Kim on Bloomberg. Higher energy and commodity prices have swollen the import bill, while semiconductor shipments fell 7.8% last month. Car-makers also face new “headwinds” as Washington offers generous subsidies to US electric-vehicle firms.

At the beginning of 2022, a whole range of companies were planning initial public offerings (IPOs) for the new year.

However, IPO plans were put on ice following Russia’s invasion of Ukraine and the resulting market turbulence.

It now looks as if the market is starting to thaw. In the past week three companies have announced their intention to float on the London market, which could inspire others to follow their lead.

What is an IPO?

IPOs, new issues and launches are methods companies and fund managers use to raise money. By issuing shares or stock units to the public, and allowing them to trade on an exchange, companies and funds can raise additional capital.

A freely tradable stock can also allow founders and existing investors to cash out at a potentially higher valuation than they might otherwise be able to achieve. Moreover, as IPOs tend to receive a lot of press coverage they can help a company raise its profile. This can be good from a public relations perspective and can help the business build its reputation among consumers.

In a typical IPO, a private company will hire an investment bank (such as Goldman Sachs) to manage the process and drum up interest from its clients to buy the newly issued shares. The bank may also ‘underwrite’ the issue, essentially stepping into the market to make sure all of the new shares find a home (it will then sell the stock on the open market at a later date).

The aim of using an investment bank to manage an IPO is to increase interest in the offering and make sure the demand for the shares exceeds supply, pushing the stock above the offering price.

Public vs private companies

Most companies start off as private businesses. Therefore they will have to go through the IPO process at some point if they want to become a public company.

The main difference between public and private companies is the fact that public corporation shares are freely traded on an exchange. Public enterprises usually have to comply with stricter regulations and reporting requirements than private businesses.

For example, every public business must publish an annual report showing its income, balance sheet and cash flow statements. Most private businesses do not have to provide this level of information.

As IPOs tend to be quite expensive, other methods of private companies coming to market have been developed over the past few years.

In a reverse merger, a private company acquires a publicly-listed company without raising capital, which simplifies and streamlines the process. Another method is the direct listing. Under this method a private company sells its existing shares to the public without creating new ones, removing the need for an investment bank to act as an intermediary. “Special purpose acquisition companies” – Spacs – have also become popular in the US in particular.

Are the upcoming IPOs a good investment?

IPOs are not necessarily great investments. Many new listings jump on their first day of dealing, but it can be tough for individual investors to capitalise on this bounce as investment bankers and insiders are usually first in line to receive shares.

What’s more, as a company is usually trying to list at the highest price possible, it can be an expensive way to buy into an investment. As the US investor Warren Buffett once said, IPOs come “with an informed seller thinking it’s a pretty good time to go public.” That means it’s not very likely investors will be able to bag a bargain, although this does not necessarily apply to direct listings and reverse mergers.

Below is a list of notable upcoming IPOs. This is just a guide and may change depending on market conditions, deal structures and regulations, among other factors.

Upcoming UK IPOs

Sustainable Farmland Trust plc

IPO date: 12/09/22 This new trust is aiming to invest in a portfolio of US farmland assets. Its manager, Intl Farming Investment Management LLC, has identified a pipeline of $3bn of potential deals. The group already manages $2bn of assets for investors.

The new company is looking to raise £200m to invest in opportunities, and is targeting a net initial yield of 4.5% of its net asset value. It aims to achieve a net asset value (NAV) total return of between 7% and 9% per annum once fully invested.

This is the first farmland-focused investment company to list on the London market.

Independent Living REIT

IPO date: 04/11/22

Aiming to address the “shortage of high-quality supported housing” Independent Living is looking to raise £150m by way of a placing, offer for subscription and intermediaries offer.

It has identified a £500m pipeline of assets, including homeless accommodation, care facilities and specialist supported housing for adults with learning difficulties, mental health issues or physical disabilities

The firm intends to become a Real Estate Investment Trust (REIT) when it has acquired its initial portfolio of assets.

It is targeting a dividend of 5p per share for the first and second years following its IPO. Including capital growth, Independent Living is looking to grow its NAV at 7% to 10% over the medium term (on a total return basis).

Welkin China Private Equity Limited

IPO date: n/a

Welkin China Private Equity has announced its intention to float, but as of yet, no date has been set for the offering.

The company is looking to raise $300m to invest in a “broadly diversified portfolio” of Chinese private equity investments. Welkin, which will act as the trust’s investment manager, has plenty of experience with the Chinese private equity market.

According to its own figures, its investments have delivered a compound annual return of 28% to the end of 2021. The trust will be targeting a NAV total return of 15% over the long-term.

US/international potential IPOs

*Not stated

What a thing it must be to unexpectedly find yourself prime minister – or chancellor. What a thing it must also be to find yourself in one of those situation when it’s all going wrong.

Prices in the UK are still rising fast (not just for households, companies are being hit by the energy bill madness too). Economists used to think inflation would peak around 10% – and that was considered a bit out there. Now forecasts of 20% aren’t considered out there at all (analysts at Goldman Sachs are forecasting 22% by next year). Interest rates are set to keep rising (perhaps to an almost historically normal sounding 4% or so). House prices are beginning to stall in response (flattish in July and August on the latest numbers from Halifax).

There could be a sterling crisis under way. The stockmarket isn’t exactly covering itself in glory: the FTSE 250 is down 21% year to date and the latest data from the Investment Association shows money pouring out of UK equities. Total outflows from UK open-ended funds by retail investors come to some £11.5bn this year already. We think there is significant value in the UK equity market (valuations are far from challenging). Clearly not everyone agrees.

Liz Truss would have known as she stepped through the door of No.10 this week that she hasn’t got much time to have a bash at sorting things out. In a sense that gives her a huge opportunity to be radical: with two years left to a general election and her party very behind in the polls what’s the downside (for her at least) to being radical? We look at her first attempts at this in politics, but are also watching to see what might come next.

A good time for a holiday

Tiny silver linings for you. First savings rates have risen a little – it is now possible to get 3.5% on your savings (a mere seven percentage points or so less than inflation!).

Second, the Daily Mail has come up with an utterly brilliant way for you to save money: leave the UK. Not for ever, of course, but for at least a few weeks of what looks like it will be an unpleasantly expensive (and angry) winter.

If you go to Valencia, you can apparently pick up a three-week cruise to Dubai for £775 a head all inclusive. That looks pretty good (too good to be true?) if you consider that the average monthly household budget in the UK based on 2.4 people is around £2,500 – and that’s before taking into account inflation. Otherwise there is a nice looking 17-night cruise from Genoa to Port Canaveral for £749.

Or perhaps, if you want to stay closer to home and cut the travel-to-boat cost, consider a ten-day round trip from Marseille (taking in Lisbon at one end and Sardinia at the other) for just £789. None of these will feel like the most luxurious trip you’ve ever been on (think cheap wine and an inside lower deck cabin), but I’m not sure staying at home is going to feel that good either.

Finding the best dividend stocks to beat inflation isn’t as easy as it sounds. But owning income shares with prices rising could be a sensible decision for investors.

According to research from Goldman Sachs, during periods of high inflation (greater than 5%), dividend stocks tend to do better than the wider market. The investment bank’s research is based on data for equities in the S&P 500 index going back to 1940.

A deeper look into the data only reinforces this conclusion. In the 1970s, a period of very high inflation in the US, the S&P 500 delivered total returns of 77% of which three-quarters was attributable to dividends and dividend reinvestment.

The data also shows that dividends can be an important component of total returns even in a low-inflation environment. Dividends and reinvested dividends have made up about half of the total returns of the MSCI AC World Index over the past two decades.

However, not all income stocks are created equal. Some companies are better positioned to deal with pricing pressure than others. Here are five dividend stocks that look best-placed to deal with rising inflation.

Dividend stocks to beat inflation

At the top of the list is FTSE 100 beverages giant Diageo (LSE: DGE).

Companies with the most pricing power are in the best position to pass on rising costs to consumers, and there are few corporations in the FTSE 100 with the same kind of pricing power as Diageo.

The company’s portfolio of brands, which includes premium and non-premium products such as Guinness, Smirnoff Vodka and Johnnie Walker whisky, means it has distribution across a number of price points and international markets.

With its substantial economies of scale and buying power, Diageo also has some of the best gross profit margins in the FTSE 100 providing a high level of protection against inflation to the firm’s bottom line. Companies with fatter margins are better positioned to absorb higher costs.

These qualities help Diageo stand out to me as being one of the best dividend stocks to beat inflation despite growing economic headwinds. The stock offers a 2.2% yield.

Rising commodity prices are driving inflation

Rising commodity prices are one of the main reasons why inflation has exploded over the past couple of months. One of the main beneficiaries of this boom is Glencore (LSE: GLEN). The miner and commodity trading house is virtually unrivalled in terms of size and scale in this market. It has access to information and pools of capital other companies can only dream of.

With its vast resources, it is able to take advantage of commodity pricing differentials in markets around the world. For example, if it can buy coal for $100 a tonne in one country and sell it in another for $105, Glencore will do just that.

With trading profits booming, Glencore thinks it will earn $3.2bn from its trading business this year, that’s at the high end of management’s expectations. And the longer these commodity market disruptions last, the longer the group will be able to earn abnormal profits.

Glencore has shown a willingness in the past to return excess profits to investors when it can, and that’s what analysts believe it will do this year.

Refinitiv analyst estimates have the stock yielding 8.9% this year and 8.5% in 2023. Additional cash returns could be on the cards in the form of buybacks as the company continues to earn bumper profits.

A dividend champion rising from the ashes

A company that might not be the first point of call for investors looking for income stocks to beat inflation is Phoenix (LSE: PHNX). This firm manages pension policies for over 13 million customers with just under £270bn of assets between them.

Phoenix has grown by acquiring books of closed pension policies, which other companies are trying to offload. By aggregating these assets, the group can streamline operations, reduce costs and earn a return on investment. It also branched out into the more conventional retirement savings market with the acquisition of Standard Life Aberdeen's insurance arm in 2018. Today, this is a key area of growth for the business.

Unlike other peers in the sector, such as Aviva (LSE: AV) and Legal & General (LSE: LGEN), Phoenix does not offer general insurance on cars or properties. Instead, it focuses exclusively on managing pensions and long-term savings products.

This focus on one product line (the group is also almost entirely based in the UK) might put some investors off from owning the stock. While I understand this viewpoint, I also think this business has some great qualities for an inflationary environment.

Phoenix does not manage the assets it holds to meet liabilities itself. It outsources this work (to keep costs low) and the managers have a mandate to invest these assets to deliver predictable returns. That’s very important when you’re talking about people’s life savings.

The company also hedges its business against inflation. In its latest results release the firm stated that the current inflationary pressures will have no material impact on its financial performance.

All of this means Phoenix has the hallmarks of a stable and predictable business, with stable and predictable cash flows. Indeed, management has calculated that the firm can generate £17bn of cash over the coming years. After stripping out expenses and other costs, the group reckons it will have £12bn of available cash to return to investors (excluding the impact of any acquisitions).

The stock currently yields 7.9%.

Defensive dividend stocks to beat inflation

A recurring revenue stream is a great advantage for any business, even more so if growth is built into that income stream. Long-term commercial rental contracts are a great example of repeat revenue streams and most commercial leases have clauses allowing for rents to be reviewed at regular intervals. This is very valuable in an inflationary environment.

Primary Health Properties (LSE: PHP) owns hundreds of medical facilities, mainly health centres and GP surgeries across the UK and Ireland. Five-year rent reviews are built into most of the company’s leases and the majority of its revenue comes from government agencies. I don't think you could find a more secure, inflation-proof income stream than that.

Structured as a real estate investment trust (Reit), Primary Health supports a dividend yield of 4.6%.

A defensive play with inflation-beating credentials

Utility Severn Trent (LSE: SVT) benefits from both an inflation-linked recurring income stream and a unique asset base that will only grow in value as prices rise, two qualities that make it stand out as one of the best dividend stocks to beat inflation.

Inflation will increase the value of the firm’s assets, such as pipes and treatment plants, which are costly and time consuming to replace.

What’s more, inflation will also reduce the value of the group’s debt in real terms. That should lead to an overall improvement in net gearing. Net gearing currently stands at around 60%, and 69% of this is fixed-rate borrowing.

The company is regulated by Ofwat, meaning it cannot raise prices as it sees fit, but the regulator is still allowing for growth. Severn Trent is offsetting higher costs elsewhere through cost-saving measures such as energy self‑generation, which now meets 50% of its needs.

These measures should allow the business to continue to grow its payout throughout the rest of the current regulatory period, which lasts until 2025. The stock offers a dividend yield of 3.6%.

Disclosure: Rupert Hargreaves owns shares in Diageo and Phoenix Group.

In recent weeks investors had started to bet on “firm signs that the inflationary peak is in sight”, says Nils Pratley in The Guardian. “We’re not there yet.” Annual US inflation hit 9.1% in June, the highest level since 1981. The price rises were driven by soaring energy prices, up 41.6%, the biggest jump since April 1980. Annual rises in food costs, up 10.4%, and shelter, up 5.6%, also registered new multi-decade highs. UK consumer price inflation hit a new 40-year high of 9.4% last month.

Central banks will keep on tightening

The inflationary pot “just keeps bubbling over”, says Danni Hewson of AJ Bell. Markets expect the Federal Reserve to raise interest rates by 0.75 percentage points later this month. Analysts also think the Bank of England will raise rates by half a percentage point next month. You might feel like you’ve heard this one before, but there are “signs that an inflation peak might finally have begun to arrive” as it’s “clear things are cooling off” in commodity markets.

US pump prices have fallen back in recent weeks thanks to lower oil prices, says Justin Lahart in The Wall Street Journal. “The S&P GSCI agriculture index, which includes crops such as corn and cocoa, has fallen by a quarter since its May peak”. The industrial metals index is down by a third. Still, annual core inflation – which strips out food and energy prices – is still a worryingly elevated 5.9%.

With the US labour market firing on all cylinders, policymakers may well decide that “rising wages could put lasting upward pressure on prices”, causing them to press ahead with interest rate hikes.

A new economic age

The latest inflation figures are more bad news for US president Joe Biden, says Samira Hussain for the BBC. “The real value of American hourly earnings has dropped faster than at any time since the 1980s.” Unhappy voters may punish the Democrats at November’s mid-term elections.

Biden will have to pin his hopes on data suggesting that so far “US consumers are bending but not breaking under the weight of rising interest rates and higher prices”, says the Financial Times. American retail sales rose 1% last month, while strong job creation is keeping unemployment down at 3.6%.

Still, signs of “evident strain” among poorer households are emerging. During the pandemic, US personal savings rates spiked above 30%. That number has since tumbled below 6%, the lowest level since 2013. Whatever central bankers do, history suggests that larger “tectonic forces” herald structural inflation ahead, says Stephen Mihm on Bloomberg.

The past four decades of disinflation were driven fundamentally by globalisation – cheap Chinese labour and fierce international competition kept prices low. Similarly, mild inflation was seen between 1870 and 1914, a previous period of globalisation that was ended by conflict between the great powers.

Between Donald Trump’s trade wars, Brexit trade barriers, pandemic-ridden supply chains and the invasion of Ukraine, recent events have thrown “one wrench after another into the carefully calibrated global economic machinery”. Eras of low inflation “don’t last forever”.

“There really is no pretence now that the Fed [hasn’t], in an act of penance for allowing inflation to get out of control, donned a horsehair shirt and is fully prepared to drive the US economy into recession,” says Albert Edwards of Société Générale. The more important question is whether bringing about a recession will dispel fears about inflation. “The outlook for commodities is key, especially with the backdrop of the war in Ukraine. But I still see commodity prices plunging just like in Q4 2008.” Back then, headline inflation dropped from 5% to -2% in just 12 months.

Certainly, recent trends in commodities have been more bearish. The S&P GSCI index of 24 major raw materials is up 31% in 2022, but has fallen back 9% since mid-June on growing fears of a recession. Copper, a key gauge of the global economy’s health, has hit a 16-month low after losing 22% since a peak in early March. “In a downturn, construction slows – copper is used in wiring and plumbing – and other industries make fewer things like electrical equipment, which also uses the metal,” says Lawrence Strauss in Barron’s.

Meanwhile, Chinese benchmark iron-ore prices are down 43% over the past year. China’s “voracious economy usually consumes about half of global industrial metal supply and more than 70% of the world’s iron ore”, says Lex in the Financial Times. About 40% of domestic steel (which is produced from iron ore) goes into the property sector, but Beijing’s crackdown on excessive leverage means that “floor space both sold and newly started is dropping at double-digit rates year on year, [a situation] not seen since the global financial crisis”.

Aluminium is also trading close to a one-year low, “with zinc and nickel not too far behind”, says Ehsan Khoman of bank MUFG. As well as faltering demand from China, “higher than expected Russian supply is leading to more stocks being deposited on to European exchanges”.

EV metals run out of charge

Not everyone is gloomy. Commodities have yet to peak, say analysts at Goldman Sachs. “Economic growth and end-user demand [are] simply slowing, not falling outright.” Yet some key electric vehicle (EV) metals – cobalt, lithium and nickel – may still be heading for a rough patch. There has been “a surge in investors’ capital into supply investment tied to... long-term EV demand... essentially trading a spot-driven commodity as a forward-looking equity”, say Goldman’s analysts. The result of short-term oversupply is that lithium prices, up more than 400% over the past year, are heading for a “sharp correction” over the next two years, and cobalt and nickel will also weaken. However, long-term structural demand from more electric vehicles should bring a rally after 2024.

“Commodities bulls may soon regret their enthusiasm,” says Gary Shilling on Bloomberg. The very long-term trend is for commodity prices to fall as people find cleverer ways of using resources. “Except for brief rises during wars and the 1970s oil embargoes, inflation-adjusted prices have fallen steadily since the mid-1800s, by a total of 83%... Bet on human ingenuity, not shortage-driven chronic price rises.”

Yesterday we talked about acquiring the right investment psychology and, in particular, about how if you want to ride out a bull market, you need to keep dosing up on knowledge that reinforces the bullish thesis.

On that note, I enjoyed listening to Bloomberg’s Odd Lots podcast this week with Goldman Sachs metals strategist, Nicholas Snowdon.

The recent price action in metals has cast doubts in my mind as to the secular bull market. I needed gee-ing up with some bull food.

I came away from the conversation wanting to buy as many metals producers as I possibly can.

The outlook for copper is very bullish

“By the middle of this decade, we’re forecasting the largest ever deficit in the copper market,” says Nicholas Snowden of Goldman Sachs, talking to Bloomberg’s Odd Lots podcast. “So just two years away from now. And by the end of the decade, the largest ever long-term deficit. It’s just an impossibly tight future.”

When I hear stuff like that from randos on the internet I tend to call “BS” – it’s usually sensationalising or clickbait, so my instinct is to filter out. But when it’s coming from respectable employees of respectable institutions, the implications are rather different.

Let’s start with the recent correction in copper prices. That was caused, says Snowden, by weak Chinese demand (due to their Covid lockdowns). There were also higher than expected exports from Russia (!). But both of these are transitory factors.

The longer-term bull market is underpinned by two factors. First there is increased demand due to decarbonisation, net zero, etc. That will require a lot of copper and there is no obvious substitute.

Second, there has been a chronic lack of investment in the sector. This is a drum we have been beating on these pages, but it is nice to hear that view endorsed by a Goldman Sachs analyst.

Demand for copper this year will come in at around 24 million tonnes. Of that, about 22.5 million tonnes is “normal” – copper in construction, wiring and so on. Only 1.5 million tonnes of demand is “green”, decarbonisation-related demand. That is to say for electric vehicles (EVs), EV infrastructure and so on.

By 2025 this “green” demand will double. By 2030, that number is projected to be six to seven million tonnes. In other words, green copper demand will rise from being about 5% to 20% of annual global demand.

Where is that extra supply going to come from? Production is set to increase slightly this year, but then it flatlines after that when it needs to rise to meet demand.

In the bull market of the 2000s, Snowden observes, projects were quickly approved, investment flowed, and supply reasonably quickly caught up with the increased demand (from China mostly). It’s different now.

“Over the last two years,” he says, “even though copper demand has doubled, there hasn’t been a single new copper mine approved.” I can’t believe that not a single copper mine has been approved – but perhaps not a significantly-sized one.

“The number one constraint on the copper mining industry is the experience of the last cycle. Because the mining industry faced a near-death experience in 2013 and 2014, as a result of the overbuild in response to high prices in the mid-to-late 2000s. Now you have a much more conservative mentality amongst management teams in the mining sector, reflecting that experience.”

I’ll say. The memory of 2013-2014 still lingers, and not just in my mind. We won’t forget it in a hurry. “Internalised trauma,” Snowden calls it, and it slows down investment.

Meanwhile, the permitting process, largely for environmental reasons, has got a lot slower. What would take six to 12 months now takes two to three years. Chile is the world’s largest producer, but it is also one of the hardest places to get a copper project going.

That slows investment, as does the ESG influence on investor allocation. Less capital goes to mining because it does not tend to score well through the ESG filter.

Another observation we have made on these pages, particularly as regards oil and gas, is the talent factor. Mining is hard. Who wants to work in mining when you can earn more, while risking less in tech? The gains are quicker and the aggro is lower.

“You’ve got a real bottleneck now on skilled labour in the industry,” says Snowden. “There aren’t enough engineers to a project.” That puts upwards pressure on wages and from there on capex and ultimately on prices.

In short, painful memories of previous over-expansion are holding back investment; opening mines is harder because of increased regulation; and there’s a shortage of people.

There are no obvious substitutes for copper

Substitution – using something other than copper – might look like a solution. After all, other metals conduct electricity too. But there are practical issues with all of these too – not least supply. The decade of underinvestment has led to a shortage of supply of base metals across the board.

Higher prices will solve a great deal of this. Mining will be incentivised; investment in alternatives will increase; technological advances will reduce the amount of raw material required; recycling and scrap supply increases; tailings get reprocessed.

But there doesn’t seem to be any “shale gas moment” for copper on the horizon – ie, a breakthrough technology that rapidly improves production.

Perhaps more importantly, the incentive to substitute is low. As Snowden notes, the cost of the copper content of an EV is a small part of the overall cost of the EV, so the copper price would have to go really high to motivate change. Similar observations might be made about tin and silver – they are in everything electronic, but in relatively small doses.

Copper needs to go to a price that incentivizes all the above change. It’s currently $9,700 per tonne. Snowden targets $15,000, but “doesn’t rule out that it could go to $50,000 or $100,000.”

I remember at the peak of the last bull market, people were melting down coins, theft was everywhere – a bronze statue got stolen and melted down. We are not at that point yet. In fact, Snowden thinks, using a baseball analogy, we are still in the first innings.

I hope he’s right, because I’m long copper and copper producers.

So how do you invest in this bull market?

How to invest in copper

There is no shortage of methods, depending on your risk appetite – from futures to exchange-traded funds (ETFs) to spread bets to stocks and shares. If you want to simply play the copper price, without taking in individual company or mining risk, there is the Copper ETF (LSE: COPA).

Then there are the miners. If you don’t want individual company risk, there is even an option for you there: the Global X copper miners ETF, the most liquid version of which is listed in New York (NYSE: COPX) but there are also “subsidiaries” in London, denominated in dollars (LSE: COPX) and sterling (LSE: COPG). The last one is probably the best way to avoid broker forex charges, though you’ll end up paying them by the back door.

London has no shortage of options when it comes to mining companies. There are the giants: BHP Group (LSE: BLT), plus Glencore (LSE: GLEN), Anglo American (LSE: AAL), Rio Tinto (LSE: RIO), and Antofagasta (LSE: ANTO).

US-listed Freeport-McMoran (NYSE: FCX), the world’s second-largest producer (after Chilean state-owned Codelco), should also probably get a plug, as it’s a purer play than most of the mining giants, Antofagasta aside.

There are plenty of smallcaps and midcaps. I’ll leave those to you to unearth – Canada and Australia probably have the most listed, although there are also plenty on London’s Aim. It’s a mining junior so caveat emptor.

Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.

“The bears are here for India’s stockmarkets,” says Megha Mandavia in The Wall Street Journal. “While a full-scale massacre isn’t necessarily imminent, investors should brace for a nasty mauling.”

India’s BSE Sensex index has been a top pandemic performer, gaining 77% over the past two years, despite a severe wave of Covid-19 in early 2021. Investors have been optimistic about the country – a thriving technology sector and major economic reforms are among the “novel confluence of forces standing to transform its economy over the next decade”, says The Economist. Yet the bullish mood may now be under threat for now. The Sensex has slid almost 8% so far this year.

The end of the party

The end of the party is partly due to the Reserve Bank of India (RBI). It recently raised rates for the first time in more than three years, by 0.4 percentage points to 4.4%, and is set to go much higher. Investment bank Goldman Sachs is forecasting a further 1.25 percentage point increase in rates this year.

As in many countries, higher interest rates are being driven by soaring prices: domestic inflation hit a 17-month high of 6.95% this March, well above its target range of 2%-6%. However, the RBI has a distinctly tricky task ahead of it, says Mimansa Verma in Quartz India. Its challenges also include supporting the rupee, which faces multiple severe headwinds such as “soaring crude oil prices, the US Federal Reserve raising its interest rates, and an exodus of foreign money”. For example, the country imports 80% of its oil, so as oil prices soar, the current account deficit is set to increase. These factors help explain why the rupee has fallen against the US dollar, recording a new low of ₹77.73 a dollar this week.

Fleeing foreigners

These factors help to explain notably weaker demand for Indian stocks. “Foreign investors have been selling stocks in India since September, taking out nearly $24bn,” says Bloomberg. Now there are signs that domestic retail investors are starting to sell. High-flying tech stocks have been particularly hard-hit, with the sector falling by nearly 21% this year.

The performance of the country’s largest initial public offering (IPO) is another disappointing sign, says the Financial Times. This month, the government sold a 3.5% stake in state-run Life Insurance Corporation (LIC). While the IPO had been scaled back in size, it was still three times oversubscribed and priced at the top of its range. There were expectations that it would “yield windfalls for millions of investors”. Yet the shares fell 9% in their first day of trading this week. “The drop demonstrates that the country’s equity market is losing its appeal.”

“There has rarely been a better time to add commodities to a portfolio as a hedge against inflation, geopolitical risks and potentially hostile market environments,” says Jeffrey Currie of Goldman Sachs. The S&P GSCI index, which tracks a basket of 24 major commodities, has risen 35% over the past year and analysts see more gains ahead.

Bulls such as Goldman point to “extremely tight inventories, underinvestment across the commodity sector and slow-responding supply”, says Alex Gluyas in the Australian Financial Review. The rise of environmental, social and governance (ESG) investing means that while “capital has never been cheaper due to low interest rates, it has never been more expensive to build infrastructure and equipment such as mines, steel mills”, or drill for an oil and gas well.

The shortages are broad based. “Copper stocks at major commodity exchanges sit at just over 400,000 tonnes, representing less than a week of global consumption,” say Neil Hume and Emiko Terazono in the Financial Times. Citigroup analysts think demand for lithium, which is used in electric car batteries, will exceed supply by 6% in 2022. It’s not just metals either. Stockpiles of arabica coffee, “the higher-quality bean loved by espresso aficionados”, are at their lowest level in 22 years. US Soybean prices are up 18% this year already. Wheat prices have also risen on fears that major exporters Russia and Ukraine are about to descend into war.

Aluminium takes flight

Then there’s aluminium, says Laurence Girard in Le Monde. The metal is used in everything “from coffee capsules to cans to aeroplane cabins”. It also plays a key role in the infrastructure needed to decarbonise the economy. Last week it hit a 13-year high on the London Metal Exchange at $3,236 a tonne. The metal is up 16% already this year and not far off its all-time high of $3,380 a tonne.

The squeeze is a consequence of soaring energy prices that have seen European and Chinese smelters cut production. “On average, producing a ton of aluminium uses the same electricity as an average US family consumes in [a] year,” says Javier Blas on Bloomberg. Aluminium’s extensive presence in our daily lives means that the price rally will be another source of inflation across the economy.

The 67 million tonne a year market ran a deficit of more than one million tonnes last year. That should continue. China accounts for “nearly 58%” of the market, but the industry is under pressure to cut pollution and energy usage. High electricity prices elsewhere mean there are few producers ready to step in, while the electrification of ever more of the economy means a growing number of products contain the metal. Hence Goldman predicts prices could hit $4,000 a tonne within the next 12 months.

I’ve had a letter from my auto-enrolment pension provider, Aviva. It tells me that my pension is worth £19,574.25. That’s nice (I have savings with other providers). But it almost immediately gets less nice. Aviva also tells me that “at retirement” my pension “could be worth £18,800.” I read that a few times to make sure I had not misunderstood. I had not: Aviva reckons that by the time I am 65, it will have lost me £600.

This is where it gets interesting. On page six of the confusing documentation, Aviva adds a little meat to the bones of all this. It turns out that £18,800 is not the nominal amount of money it expects me to have in 15 years’ time. It is the “real” amount. Aviva has “made an allowance for future inflation” to give me an idea of how much I may be able to buy with the income from the £18,800 (£42 a month should you be interested…) if I received it today.

This isn’t a bad way to do it. But it does come with two problems: almost no one will read to page six; and Aviva, one of the UK’s largest money managers, does not trust itself to be capable of investing my money so as to preserve my purchasing power over the long term (I think we can all agree that in stockmarket terms 15 years is the long term). I mentioned last week that this is no time for financial passivity. I think this rather proves the point. I’m going to have to move.

All that said, it won’t be as easy to make money over the next 15 years as it has over the last 15. In this week's magazine, John looks at investing guru Jeremy Grantham’s ideas on this (listen to Grantham discuss them on the MoneyWeek Podcast. He is sure that the US at least is in what he calls a “super bubble” – one that, thanks to soaring inflation (our cover story this week explains part of the reason why); the high risk that this will lead to a wage/price spiral (workers demand higher wages to compensate for rising prices, which drives prices even higher); the return of geopolitical risk; and the recognition that while a fun growth story is nice, cash is nicer; is now starting to burst. This week almost every big fund management firm announced it is time to buy the dip. If Grantham is right, it is not – in the US at least.

Insuring against all this is tough (perhaps Aviva is just rather more honest than other professional investors). But it isn’t necessarily impossible. Goldman Sachs suggested this week that we buy gold again, as a hedge against “bad inflation.” Most MoneyWeek readers will, I think, have some gold as a hedge. It hasn’t covered itself in glory so far this cycle, but it is still the one asset we have easy access to with a multi-millennia record of protecting against inflation. So it is worth holding.

Silver might be too (for more, listen to this week’s podcast with Julian Brigden). We’d say the same for profitable companies with good records of paying rising dividends. The latest Link Dividend Monitor reports that UK payouts rose by 46.1% last year, led by a surge in special dividends from miners. Link is not convinced this will continue, but given the supply and demand dynamics in many commodity markets, we wouldn’t be so sure. The same goes for oil companies: with oil at a seven-year high they should soon be rolling around in cash, some of which will end up in shareholders’ pockets. Buy good companies at the right price today, and it seems unlikely you will be out of pocket in 15 years.

“The European energy crisis is not over yet,” said Goldman Sachs in a research note this week. The bank’s analysts think that gas prices could remain twice as high as normal until 2025. British wholesale gas prices, which are heavily influenced by Europe, are currently about four times higher than they were a year ago, at 218p a therm. An escalation in Ukraine could see prices top their highs of last December.

It might not come to that, says Bloomberg. Germany, which is highly dependent on Russian gas, has long argued that Moscow is a reliable supplier: it “kept sending gas to Europe all through the Cold War” and during the 2014 Crimean annexation. Russia is thought to be unlikely to want to damage that reputation. It is also economically dependent on the revenue from energy sales. Still, if the US throws Russia off the Swift payments system then energy transactions could become impossible. Nord Stream 2, a new energy pipeline to Germany that bypasses Ukraine, could be hit by new sanctions. Finally, a war could damage key Ukrainian pipelines that deliver gas to the West.

Liquefied natural gas (LNG) cargoes have been diverted from Asia to Europe in response to soaring prices, but LNG is no silver bullet, says Deutsche Welle. EU gas storage facilities are just 47% full, compared with a more normal level of 60% at this time of year, according to a report by Commerzbank. If Russian supplies are disrupted, “LNG would not be able to fully compensate”. There is “a lack of free short-term capacity among exporters such as the US and Qatar”. If things get very tight then governments may be forced to “ramp up coal power stations… environmentalists will not like that… but that really is the only possibility in the short term”.

Oil prices have hit a seven-year high amid fresh tensions in the Middle East. Houthi rebels in Yemen claimed responsibility for a drone attack on an oil storage site in Abu Dhabi that killed three people on Monday. Brent crude topped $88 a barrel on Tuesday and has risen 13% so far this year.

“The attack is another reminder of the highly complex missile and drone threat faced by the UAE and the region’s other main oil producers,” says Torbjorn Soltvedt of risk intelligence firm Verisk Maplecroft. “Over the coming weeks, we expect oil’s Middle East risk premium to come more sharply into focus.” Analysts at Goldman Sachs are now predicting that Brent crude will hit $100 a barrel in the third quarter of this year, says Matt Egan for CNN.

The bank forecasts that “oil inventories in advanced economies will sink to their lowest level since 2000” this summer. Previous price spikes have subsided after US shale producers ramped up production. However, while US shale reserves are “large and elastic”, reduced investor willingness to fund fossil fuels means it could take higher prices to bring shale supplies into play this time.

The US is pressing Saudi Arabia and its allies in the Opec+ cartel, which accounts for around half of global oil output, to raise production, says Stanley Reed in The New York Times. The group slashed output by ten million barrels a day at the beginning of the pandemic and is only slowly restoring production.

Libya, Angola and Nigeria are undershooting their output targets because of “political turmoil, outmoded regulatory regimes” and creaking infrastructure. Saudi Arabia, which accounts for about 10% of the global market, could produce more, but Riyadh is so far ignoring Washington’s pleas for help for fear of “busting up the arrangement with other producers”.

“Sanity” is making a “tentative return” to the market, says Robin Wigglesworth in the Financial Times. Stocks have so far shrugged off hints that we are heading for tighter monetary policy, but frothier corners of the market are finally starting to deflate.

Many of this year’s “most heinously silly trades” have come undone in recent weeks. Take the flagship fund at Ark Invest, run by fund manager and noted bitcoin bull Cathie Wood. Its big bets on artificial intelligence and genomics helped it gain almost 150% in 2020, but it is down by more than 21% this year. A Goldman Sachs index of unprofitable US tech stocks is down “more than a fifth” over the past month.

Investors buy unprofitable tech stocks because they hope to make money in the future, but higher interest rates prompt some to sell and put their cash into assets that make returns today instead. There have been few things sillier in 2021 than the rise of the “meme stock”. Ordinary “retail investors” have been co-ordinating on the internet forum Reddit to drive up the price of certain stocks.

There is little rhyme or reason to which stocks become fashionable, beyond a desire to bet against Wall Street hedge funds and vague childhood nostalgia for bricks and mortar video game retailers (GameStop) or struggling cinema chains (AMC Entertainment). GameStop shares surged by as much as 2,700% earlier this year, but on Monday they tumbled to their lowest close since March, says Janet Cho in Barron’s.

Cryptocurrencies, another big winner of the 2021 market madness, are also coming under pressure. Bitcoin has been trading as low as $46,462 this week, down more than 30% since last month’s all-time high. Ether, another cryptocurrency, has fallen 20% over the same period.

Hopes for emerging economies and their markets were high when Goldman Sachs first published “the Brics dream” in 2001.

But the reality hasn’t lived up to expectations: China’s economic progress has beaten expectations, India’s is broadly in-line, but Brazil and Russia have lagged badly.

In Goldman Sachs’ “Next 11”, only Vietnam and South Korea are unquestionably on track.

Can they recover their early promise? And what might that mean for your portfolio?

Why emerging markets have yet to live up to their promise

With the exception of the renminbi, emerging market currencies have been weaker than expected in the early days of the millennium, while stockmarkets have significantly under-performed forecasts.

Only China has done well – yet its market is 30% below its January high and doubts about the future are growing.

Meanwhile, emerging markets account for just 11.6% of the MSCI All Countries World index, which covers 85% of global investable equities. This proportion falls to 8.4% if Taiwan and South Korea (which should now be regarded as developed), are excluded.

Yet emerging economies account for 37% of world GDP at current exchange rates and comfortably over 80% of the world’s population. China alone accounts for 15% of world GDP and nearly 20% of the world’s population.

So why are emerging markets so under-represented in world stockmarkets?

Part of the reason is that less economic activity is represented by stockmarkets in emerging economies than in developed ones. Developed market companies have a much larger presence in emerging economies than vice versa.

The determination of the well-off in emerging economies to convert their savings into hard currency and, preferably, put them in an offshore bank or investment account should never be underestimated.

Emerging markets have also been crowded out, as have all other markets, by the growing dominance of the US, which now accounts for 60% of the MSCI index.

But a key reason for their markets lagging is simply that emerging economies have not lived up to the promise of 15 years ago.

The phenomenal and unexpected pace of technological transformation has favoured not just the direct technology sector but also healthcare, consumer services, vehicle manufacturing and media. US companies have proved to be the world’s best innovators; China has built a significant presence – helped by protection, the Chinese language and script, culture and politics – but successful companies elsewhere are comparatively few.

Fifteen years ago, emerging markets were well represented among the world’s leading commodities companies, but they have failed to live up to their promise. Many emerging market companies have performed well but markets have lacked the tailwind from economic growth and currency appreciation that Goldman Sachs forecast 20 years ago.

Politics has been a big factor; governments have become more authoritarian rather than more democratic and less effective than hoped for in promoting prosperity.

Narendra Modi, elected as president of India in 2014, started well but faltered in the pandemic. Jair Bolsonaro, elected by Brazilians to sweep away the corruption of previous administrations, has failed to implement hoped-for economic reforms and, like Modi, has mis-handled the pandemic. Vladimir Putin has been in power too long and Russia has remained a country controlled by oligarchs and their business empires.

There is hope for improvement in South Africa after the disastrous Zuma years, but bad policies implemented by governments from Turkey to Mexico and Thailand to Argentina are holding these countries back.

Where democracy is still in control, it seems unable to produce a government that can promote sustainable growth; where authoritarians are in power, generating prosperity is too much like boring hard work.

China is no model for emerging nations

China appears to offer a tempting alternative to the Western model of economic development with a not-so benevolent dictatorship remaining firmly in control not just of people’s lives but also the path of economic progress. This encourages other authoritarians to believe that, with China’s encouragement, they can reject the blueprint offered by Western governments.

Yet China’s recent history is a catalogue of disastrous errors. The crackdown in Hong Kong has alienated Taiwan and ended any hope of peaceful unification. China’s cover-up of the origins of the Covid-19 pandemic has fooled nobody, given itself a reputation for dishonesty and discredited its pitch for global leadership.

The repression of the Uighurs has been met with indifference by governments in the Muslim world, but the display of racist brutality has won it few friends anywhere. Border skirmishes with India have unnecessarily made it an enemy.

The trade war China initiated against Australia is resulting in fuel shortages and power cuts. Belligerence towards Taiwan and in the South China Sea has made it difficult for China to import the semiconductors it needs from Taiwan, South Korea and the US.

The Huawei scandal threw a spanner in the works for China’s wish to embed itself in communication systems around the world. The crackdown against domestic private education will lead to a boom in online education from overseas.

On top of all this, the Chinese authorities have failed to control a speculative bubble in property and the rampant borrowing that has caused it. Property and construction accounts for an unsustainable 25% of the Chinese economy but hopes that the bubble can be deflated slowly look forlorn. China may be facing a recession or at least a sharp slow-down in growth. If China were a democracy, President Xi would be worrying about his re-election next year.

It’s only a matter of time before pragmatism re-asserts itself

Yet it would be wrong to be too pessimistic. Worries about a Chinese invasion of Taiwan are legitimate but it remains unlikely. It would be catastrophic in terms of China’s standing in the world and would be highly risky. China has no history of military adventurism; the last time it tried – invading Vietnam in 1979 – was a disaster.

Xi could be replaced or forced to change course if he doesn’t do it voluntarily. Bigwigs in the Chinese Communist Party will be well aware that China’s target of superpower status was succeeding much better before Xi became president.

The focus on the distribution of wealth rather than its accumulation does not necessarily mean a reversion to Mao-style socialism; China may be just mimicking the prevailing wisdom in the West. More rigorous controls on online gaming and the internet also mirror public opinion in the West.

There are risks – but the 30% drop in the Chinese market is probably enough to discount these, making the Chinese market attractive for long term investors.

It is also foolhardy to extrapolate the mistakes of other emerging market leaders indefinitely into the future. Populism and nationalism distracts people’s attention for a while but, without rising living standards, voters or the mob in the streets will rebel.

There really is no alternative to the long slog of economic development in the time-proven way.

The first sign that the outlook is improving will be a rally in the stockmarkets of emerging economies. With confidence now at a low ebb, this might be a good time to increase exposure.

(John here – just a reminder to sign up for this month’s webinar, where I’ll be talking to Roland Arnold, manager of the popular BlackRock Smaller Companies investment trust, all about his views on prospects for Britain’s smaller companies. Make sure you don’t miss it – register here now. It’s entirely free and you can catch up later if you can’t join on the day, but do be sure to register.)

It is 20 years since Jim, now Lord, O’Neill coined the Bric acronym to cover the four most significant emerging economies: Brazil, Russia, India and China.

There followed a series of research reports from his team at Goldman Sachs projecting how these economies would develop over the following 50 years and their impact on global financial markets.

Twenty years on, how has it worked out?

Great expectations – but how have they panned out?

In 2003, the concept that spawned the “Brics” was extended to include South Africa, and in 2005 to cover “the next 11”: Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam.

The purpose was to show the growing importance of the emerging world to the global economy and the implications for inter-governmental institutions and investors. Goldman Sachs made no assumptions about political systems, but did set out “the conditions for growth.”

These were “macro-stability,” notably low inflation; “institutions”, such as the legal system, functioning markets, health and education systems, financial institutions and government bureaucracy; “openness” in trade and foreign direct investment; and “education” to provide skilled workers.

Implicit in all this were the universally-accepted assumptions of continuing globalisation, the liberal economic order, and that the first priority of governments was national prosperity as the prerequisite of all other objectives.

All this was expected to lead down the democratic path.

So looking back now, 20 years on, how has it worked out?

In 2000, the Brics accounted for 8% of world GDP at then-current prices and 23.3% at purchasing power parity (PPP), which adjusts for lower prices in those countries. This was expected to rise to 47% and 52% in 2050, by which time exchange rates would broadly reflect purchasing power.

In other words, Bric currencies would appreciate against the dollar by about 2.5% a year. As a result, in 2020, Brics would account for 22% of the world economy in dollars and 41% at PPP.

Goldman Sachs estimated annual growth in Brazil at 3.6%, with its economy overtaking that of Italy by 2025; France by 2031; and the UK and Germany by 2036. China’s growth rate was expected to fall from 8% in 2003 to 5% in 2020 and 3.5% by the mid-2040s, while India’s growth rate was expected to slow, but remain above 5%.

Russia would be hampered by a shrinking population but still overtake Italy in 2018, France in 2024, the UK in 2027 and Germany in 2028. By 2050, Russia’s GDP per capita would be by far the highest of the Brics.

These forecasts of higher growth than in the OECD reflected three factors: a “catch-up” as the Brics adopted the technologies of developed economies; high rates of investment, driven by the opportunities growth offered and increased capital per worker; and demographics, the consequences of population growth for the workforce and consumption.

About a third of the increase in dollar GDP would be accounted for by currency appreciation.

Not all the forecasts look too bad – but the markets have been disappointing

At first sight, Goldman Sachs looks on course. The Brics now account for 24.3% of global GDP in dollars and 31.4% at PPP, according to IMF data.

The detail, however, is far from that expected.

China’s share of world GDP has risen from 3.6% in dollars and 12.6% at PPP in 2000 to 17.7% and 18.8%. This is actually ahead of Goldman Sachs forecasts, particularly in PPP terms, due to 50 years of expected currency appreciation taking place in 20.

India’s share has risen from 1.6% in dollars and 5% at PPP to 3.25% and 7.2%. This is broadly in-line with Goldman Sachs expectations, helped by population growth, though GDP per head is less than a fifth of China’s or Russia’s.

Russia’s share has risen from 0.6% in dollars and 2.7% at PPP, to 1.8% and 3.1%, well behind Goldman Sachs expectation. Meanwhile Brazil’s share has actually fallen from 2% in dollars and 2.9% at PPP to 1.6% and 2.3%.

Both Brazil and Russia are well short of overtaking Italy, and Russia’s GDP per head, at $11,650, has fallen behind China’s. There has been some narrowing in the gap between dollar and PPP GDP for India and Russia but little for Brazil, indicating that currencies have not appreciated as Goldman Sachs expected.

This suggests that the Chinese stockmarket should have exceeded expectations – but Brazil and Russia lagged, especially in dollar terms. Goldman Sachs warned in 2005 that “local markets may not be the best vehicle for the local growth story” but the evidence for this at the time came from China which had seen “lacklustre performance.”

Still, “within a decade Bric’s market capitalisation could be four times bigger than today” while “Brics’ share in a benchmarked global portfolio would rise, perhaps to as much as 17%.”

In reality, Brics have fallen well short. The MSCI All Countries World index has 2,964 constituents with a combined market value of $68.4trn – this covers 85% of global investable equities, in 23 developed and 27 emerging markets.

Emerging markets account for just 11.6% of the total, and Brics for a little over half of that. China is around 4%, India below 1.5% and Brazil and Russia each a little over 0.5%.

South Korea (in the Goldman Sachs Next 11) is 1.5% of the MSCI index and Taiwan 1.7%. Taiwan was not in the Next 11; perhaps Goldman Sachs assumed that it would be absorbed by China.

Taiwan and South Korea, though, should surely be categorised as developed economies alongside Singapore and Hong Kong.

Is it all bad news?

So true emerging markets have lagged Goldman Sachs’ expectations by a long way. Even China, with the economy struggling and its stockmarket down 30% from its January high, may be going off the rails.

The Brazilian and Russian economies are based on commodities, and Goldman Sachs disregarded the “resources curse” – the fact that it is human capital, not wealth of natural resources, that makes a country prosper, and that abundant natural resources actually hinder human capital-based development.

But in 2000-2005, perhaps we all believed that “this time, it will be different.”

That the economic development of the Brics has fallen short of the Goldman Sachs projections and their stockmarkets far short, should not reflect on the quality or value of the research. It is only 2021. There is a long way to go before 2050; the Brics and emerging markets in general could get back on track after a disappointing few years.

The team at Goldman Sachs were extremely wary of translating economic forecasts into market projections. The currency appreciation implied by PPP convergence with dollar GDP was not a key part of the research, which contains many insights and much valuable analysis about the factors driving growth.

Finally, Goldman Sachs provided a valuable benchmark against which to judge Brics progress. So far, it has been disappointing and it is easy to assume that the outlook for economic and market development will continue to deteriorate – but it may not.

That will be the subject of part two.

Shares in troubled Chinese property giant Evergrande and its property management unit were suspended from trading in Hong Kong on Monday, amid reports that a major transaction is underway.

The suspension came just before it looked as though Evergrande was set to miss yet another payment.

According to the Global Times, China’s state-owned newspaper, Chinese rival Hopson Development plans to buy 51% of Evergrande Property Services. However, there’s not yet been an official confirmation of the deal, and share trading remains suspended.

So what’s going on?

The Evergrande saga

Evergrande, China’s most heavily indebted property company, has been in the headlines in recent weeks for all the wrong reasons. Its shares have fallen by 80% since the start of the year.

The company, which is struggling under a debt pile of $305bn, missed a $47.5m bond payment last week. Before that, it failed to make an $83.5m coupon payment on some of its outstanding dollar debt. Both have grace periods of 30-days. So it is too early to say whether investors will be stomaching huge losses or not (though the omens are not great).

Now, Bloomberg says, the embattled firm is due to miss a third payment: a dollar bond worth $260m that is guaranteed by Evergrande, called Jumbo Fortune Enterprises. Because the due date is 3 October, it was effectively due on Monday and failure to do so would count as default, as the debt has no grace period.

As a result of all this, the company has been scrabbling to raise cash by selling assets. This is the driver behind the sale of the property unit. Evergrande said in a regulatory statement to the Hong Kong Stock Exchange, that it was suspending its shares “pending the release by the company of an announcement containing inside information about a major transaction.” Although, as of Tuesday, share trading remains suspended with no fresh news on the deal.

Why is Evergrande facing so much trouble and could its demise reverberate beyond China?

Much of the Evergrande’s importance on the global stage has to do with the fragmented nature of China’s property market. Reuters reports: “With liabilities equal to 2% of China’s GDP, Evergrande has sparked concerns its woes could spread through the financial system and reverberate around the world, though worries have eased somewhat after the central bank vowed to protect homebuyers’ interests.”

Calling China’s real estate market huge would be an understatement: it was worth $52trn in 2019, according to Goldman Sachs, and the sector accounts for 29% of Chinese GDP. Yet around 20% of supply – roughly 65 million homes – are underoccupied, reports Business Insider.

There is too much housing and too little overall demand for homes to live in. This gap has been filled by speculators and small investors, but both are now under pressure from regulators who want to dampen house price growth.

“Speculators and investors are being blocked by government policies in cities where they want to buy, and some are increasingly concerned that developers will be unable to complete the units they are promising to build,” reports Foreign Policy.

Real estate is seen as a more reliable investment vehicle than the stockmarket in China – about 70%-80% of household wealth lies in real estate, reports CNBC, underscoring how significant a default by the country’s second-largest property developer would be. So it is unsurprising that China has been asking state-backed firms to snap up Evergrande’s assets, having ruled out the chance of bailing it out.

Should markets worry less now about a default?

Can markets take a breather now that more than half of Evergrande’s property unit could be purchased, bringing in much needed capital for the firm? Perhaps not. Lisa Zhou, Bloomberg’s Intelligence analyst, says that the potential deal “could bring short-term relief” to the liquidity problem and effectively buy the company time to fix its onshore liabilities.

However, the spillover effect into other property developers – many of whom face similar if slightly less acute problems to Evergrande – are already showing up in markets. Chinese developer Sinic Holdings was downgraded by Fitch with concerns over a bond repayment coming up in mid-October. Homebuilder Fantasia saw its bonds collapse in half, after it failed to make a $206m payment.

As my colleague John pointed out last week, it seems unlikely that Evergrande will trigger another “Lehman Brothers” moment – at least, for global financial markets.

But at the same time, stabilising China’s real estate market will take a lot more than just the sale of Evergrande’s property unit – and it has implications for the country’s growth for years to come.

Deliveroo’s “disastrous” debut “damaged London’s reputation” for big tech flotations, says The Guardian. But now the City is about to receive a “shot in the arm”: cybersecurity firm Darktrace is planning a £3bn listing on the London Stock Exchange. Founded in 2013 by mathematicians from the University of Cambridge, artificial intelligence (AI) experts and cyberspecialists from GCHQ, Darktrace creates digital-security products that “self-learn and self-heal” to enable businesses to “stay one step ahead of hackers and viruses”. Darktrace has already secured a range of customers and has an advisory board that includes the former MI5 director-general Lord Evans of Weardale.

Unfortunately, it is also beset by fraud allegations against its founding shareholder Mike Lynch, say James Cook and Matthew Field in The Daily Telegraph. Darktrace has admitted that the negative publicity concerning criminal (in the US) and civil (in the UK) charges against Lynch, which stem from his time as CEO of Autonomy, could undermine the group’s reputation and share price. Lynch, who is fighting extradition to the US, denies any wrongdoing in both cases.

Too much for Goldman Sachs and UBS

The links between Lynch and Darktrace certainly run deep, says Graham Ruddick in The Times. As well as being a “key early backer” of Darktrace, Lynch and his wife own 18.5%, which could give the stock a nasty jolt if he is forced to sell his shares. There is even talk of potential liabilities from “possible money laundering offences” related to funding provided by Invoke Capital, the investment firm Lynch co-founded. Still, while the controversy was supposedly “too much for Goldman Sachs and UBS”, which reportedly declined to take part in the initial public offering (IPO), Darktrace believes the risk of being hit by any prosecution is “low”.

Lynch’s legal woes are “hardly an ideal backdrop to a market debut”, says Helen Thomas in the Financial Times. But Darktrace “looks like the kind of tech listing the London market has actually been hoping for”. This is because it already has “more than 4,600 customers in more than 100 countries... up from about 1,600 in 2018” while its software is “quick to deploy”, meaning it can make sales by installing its system and letting it show its worth in a two or three-week trial. Such subscription contracts “mean predictable, recurring revenue”.

At the very least, Darktrace looks a lot more substantial than Deliveroo, says Simon English in the Evening Standard. For one thing, it is an “actual tech company, rather than a moped food service with an app on top”.

What’s more, “the share structure is a straight 1-1 on voting rights”, in contrast to Deliveroo’s dual-class system that many saw as “plainly unfair”. The size of the market has been estimated at $40bn, with Darktrace already making “a small profit” according to several accounting measures, compared with Deliveroo’s losses.

Coinbase, the largest cryptocurrency exchange in the US by transaction volume, goes public tomorrow, 14 April, listing on the Nasdaq stock exchange, under the ticker COIN. The US crypto giant is hoping to capitalise on the astronomical growth seen in a number of cryptocurrencies over the past several months.

Why should investors care about the listing? And should you buy in?

Why Coinbase’s stockmarket listing is important

Coinbase’s public debut is being touted as the “Amazon moment for crypto,” say analysts at wealth manager D.A. Davidson. Just as Amazon’s listing in 1997 was a key landmark in the dotcom era, so Coinbase’s listing, they say, helps to pave the way for cryptocurrencies to become more mainstream.

The last several months alone have seen a greater institutional embrace of bitcoin, with Wall Street giants including Goldman Sachs and Morgan Stanley becoming more open to crypto, while bitcoin itself has more than doubled in value since the start of the year, hitting a fresh-all time high of around $63,000 today.

Better yet, the cryptocurrency broker “actually generates a profit”, says David Trainer, chief executive of new Constructs, a financial valuation firm. Coinbase’s revenues surged by 139% in 2020 compared to the previous year. And the strong growth has continued – in the first three months of this year alone, revenues of $1.8bn outstripped the $1.3bn seen for the whole of 2020.

Coinbase doesn’t just offer bitcoin –users can also trade other cryptocurrencies including litecoin and ether. It was set up in 2012 and now has 56 million users in more than 100 countries.

The exchange is split into two parts. Coinbase acts as a cryptocurrency wallet and brokerage service, while Coinbase Pro is an exchange for advanced users which enables them to buy and sell cryptocurrencies across trading pairs (in other words you can play the bitcoin/ether exchange rate, say), as well as giving access to more obscure cryptocurrencies.

For example, Coinbase recently added coverage of cardano – a cryptocurrency darling that is seen as the next big thing after ether and has soared more than 600% since the start of the year – but this is only available to Coinbase Pro users.

Coinbase’s listing is a little unusual

Coinbase has opted for a direct listing rather than a traditional initial public offering (IPO). The logic is simple. Companies that choose direct listings over IPOs as a route to go public – as Spotify did in 2018 – avoid having to pay high fees to the investment banks that normally act as underwriters in the standard IPO process.

Unlike an IPO, no new shares are created. Instead, existing shareholders sell their stock direct to the public. Direct listings often are considered the faster and cheaper route to turning a company public.

The risk for the company is that in the absence of underwriters, there is no one to manage the process to try to make sure that the company gets the best price. That said, a direct listing for a fairly well-known consumer brand – and one associated with crypto, which tends to position itself as an alternative to Wall Street – probably makes a lot of sense for a company like Coinbase.

Why Coinbase’s valuation looks... ridiculous

Even though the public debut marks a significant moment in the crypto world, market watchers have questioned the crypto giant’s rumoured eye-watering valuation of $100bn.

David Trainer, chief executive of valuation company New Constructs, says that “the company has little-to-no-chance of meeting the future profit expectations that are baked into its ridiculously high expected valuation.”

He thinks Coinbase’s valuation should be closer to $18.9bn as rivals – including Gemini, Bitstamp, Kraken and Binance – compete for dominance in the sector. “As the cryptocurrency market matures and more firms inevitably pursue Coinbase’s high margins, the firm’s competitive position will inevitably deteriorate”.

Trainer cites the war between share trading platforms in 2019 as an example. Crypto exchanges will “likely offer lower or zero trading fees trading fees as a strategy to take market share, which would start the same ‘race to the bottom’ that we saw with stock trading fees in late 2019.”

To put Coinbase’s valuation into context, Trainer and his team reckon that to justify a valuation of $100bn, Coinbase would have to maintain its hefty 25% profit margins and also grow its revenue 16-fold by 2027. That would imply revenues roughly 1.5 times greater than the combined 2020 revenues of two of the world’s largest exchanges – the Nasdaq and the ICE.

To say that those are ambitious targets is an understatement. Even to achieve Trainer’s valuation of $18.1bn, Coinbase would have to grow revenue at a compound annual growth rate of 21% for the next decade (which matches Nasdaq’s best-ever streak) with margins of 23% (the average for investment bank and brokerage services).

Investors also need to be mindful of general sentiment. Cryptocurrencies are volatile. A crash in bitcoin could easily have a knock-on impact to Coinbase, particularly if such a crash hits trading volumes.

Finally, the wider backdrop may no longer be quite as hospitable to fast-growing tech stocks like Coinbase as it once was. As analyst Kevin Kelly of Delphi points out, “growth stocks are trading at significant premiums relative to historical average.” COIN might well struggle if the “Great Rotation” from growth to value stocks continues apace.

In all, there’s no doubt that crypto is a fast-growing market and that there’s the potential for that to continue. Only 9% of US adults currently invest in cryptocurrencies, according to researcher CivicScience, while 90% of US adults are now on the internet. If crypto reaches similar levels of adoption then Coinbase might well thrive over time. But for now, given the competition in the sector, we’d be inclined to sit and watch rather than buy in right away.

Is it time to buy commodity exporters? Goldman Sachs thinks that the Russian and South African equity indices could be poised to outperform their emerging-market peers, says Sydney Maki on Bloomberg.

Both markets are skewed towards miners and other raw materials firms, which should gain from strong global commodity prices. The bank also notes that rising real yields in the US are reducing the relative appeal of alternatives such as Chinese growth stocks.

Mebane Faber of Cambria Investment Management says South African stocks began 2021 on a cyclically adjusted price/earnings (Cape) ratio of 16.5. That is a reasonable price, but still more expensive than the FTSE (on a Cape of 14). Russia, on a Cape of just 7.3, is in a different value category entirely. There are good reasons for the steep Russian discount, says Henry Foy in the Financial Times. Weak property rights and rule of law mean an investment in the country is never truly safe. Corporate transparency is another problem. Take Siberian energy business Surgutneftegas, which has scarcely any debt and a $50bn cash pile but is valued at just $20.5bn. Investors have given up trying to guess what the cash is for and don’t expect any answers: “There is no public information” on major shareholders and the reclusive boss has been there since the days of the Soviet Union.

Russian firms are increasingly tapping Western markets directly to cash in on the global equity boom, says Alexander Marrow on Reuters. Discount chain Fix Price raised $2bn when it floated in London and Moscow last month. Gold miner GV Gold plans to do a similar joint listing later this year. “This year could be [the] best for equity raisings from Russia since 2007”, Fedor Tregubenko of UBS Group told Reuters’ Katya Golubkova.

Last week, US Federal Reserve chair Jerome Powell made his views on bitcoin clear: it’s “an asset for speculation”, one that “is essentially a substitute for gold rather than for the dollar”, Powell told the Bank for International Settlements’ digital banking conference. Nor is it “a useful store of value” because of its volatility.

Powell’s comments are perhaps unsurprising. You wouldn’t expect the governor of the world’s most important central bank to say: “rush out and buy bitcoin”. Yet his views are not necessarily shared by Wall Street, with the likes of BNY Mellon and Goldman Sachs taking bigger steps into the area of cryptocurrencies in general.

It’s little wonder that institutions are becoming more interested. Bitcoin has now been around since 2008; in that time it has survived several boom and bust phases, and in each boom phase, people have potentially made a lot of money.

Today, despite all the scepticism, it remains trading close to its recent all-time high of $61,644, thanks to a search both for inflation hedges (given the scale of public debt and money being printed by central banks) and, for returns in a low-interest rate environment coupled with frothy equity and bond markets, points out Anthony Hardy, research analyst at Franklin Equity Group.

So are cryptocurrencies becoming mainstream – and should you invest?

Banks are turning bullish on crypto

Mainstream adoption of cryptocurrencies is growing fast. Since the start of the year, several big banks have embraced crypto. Goldman Sachs, for example, reintroduced plans to launch a cryptocurrency desk for futures trading.

It’s not alone. Just a few months after America’s oldest bank – Bank of New York Mellon – announced it will roll out a new digital custody unit later this year, Morgan Stanley became the first bank to give its wealth management clients access to three cryptocurrency funds, according to CNBC.

Meanwhile, in a 108-page report published in February (which came in for some criticism), Citigroup gave bitcoin a big endorsement, saying that it “may be optimally positioned to become the preferred currency for global trade”.

It is not just the banks who are increasingly endorsing crypto. Tesla’s Elon Musk started accepting bitcoin as payment for cars earlier this month, just a few weeks after Tesla shifted $1.5bn into bitcoin.

The crypto rally has also captured the attention of individual investors who view bitcoin as a potentially better hedge against inflation than traditional hedges such as gold, primarily because bitcoin has a fixed long-run supply of 21 million coins, compared to central banks’ ability to print as much fiat currency as they like.

The US recently approved a $1.9trn stimulus plan which market participants think may be seen as the tipping point for inflation to stage a comeback (and now Joe Biden’s administration is pushing for a further $3trn spending plan). And with the Fed signalling that it won’t raise rates until 2024 at the earliest, inflation is very much at the fore of investors’ minds.

Why bitcoin may not be the best hedge against inflation

But are people really buying bitcoin because they think it’s a good hedge against inflation? Bank of America doesn’t seem to think so. “Bitcoin has… become related to risk assets, it is not tied to inflation, and remains exceptionally volatile, making it impractical as a store of wealth or payment mechanism”, Bank of America’s commodity and derivatives strategist Francisco Blanch, said in a recent note, according to CNBC.

Economist Nouriel Roubini – renowned for his bearish views and a long-time critic of digital currencies – agrees. “If people were really worried about inflation they would diversify in a wide range of assets that are historical good hedges against inflation. That's not happening”, he says.

Another point is that, while bitcoin does have a fixed supply in much the same way other assets viewed as inflation hedges such as gold, it’s still possible to launch competing cryptocurrencies which can expand the market, argues Daniel Kern, chief investment officer at TFC Financial Management.

Should you invest in cryptocurrencies?

Discussions about cryptocurrencies can be quite polarised. True believers get very defensive, while ardent crypto critics act as though the whole thing is on the verge of collapse. We take more of a middle view.

Ignoring crypto seems unwise. It’s clear that digital currencies and the blockchain are of great interest to governments and central banks. And bitcoin has now managed to survive enough booms and busts to convince us that it’s not a flash in the pan. So investors should pay attention to the space and educate themselves on it.

In a recent issue of MoneyWeek magazine, Charlie Morris made the case for holding both bitcoin and gold as hedges against different stages of inflation – he believes they complement rather than compete with one another.

Equally, if you’re not an early adopter or particularly tech-minded, we wouldn’t worry too much. If crypto becomes significant enough to be considered an asset class in its own right (rather than an evolution of currencies, say), then institutional adoption will eventually lead to investment vehicles that are more easily accessible to private investors.

If you’re interested to learn more about bitcoin generally, then you can currently get a free beginner’s guide to bitcoin when you subscribe to MoneyWeek. Get the report, plus your first six issues, absolutely free here.

Is the gold rally over? Gold hit a four-month low around $1,807 an ounce this week. The yellow metal remains up by 53% since August 2018 but is now trading 11% short of its peak this summer. The picture is similar in sterling terms, with gold 13% off its August high on around £1,352/oz. Gold is seen as a traditional safe haven. With positive vaccine news stoking optimism about 2021 investors are now keen to get exposure to the recovery rather than parking their wealth in an asset that pays no interest.

Gold has not behaved much like a safe-haven this year, says Will Horner in The Wall Street Journal. “Rather than moving in the opposite direction to stocks” it has often rallied and fallen together with them. The reason seems to be central bank stimulus. When new money hits the market investors buy stocks to enjoy the resulting asset price inflation, while buying gold as protection in case everything goes horribly wrong. A “6,000-year history as a store of value” makes the metal the ultimate hedge for those concerned about inflation.

Goldman Sachs says it sees the risk of inflation as “greater than at any other time since the 1970s”, notes Henry Sanderson in the Financial Times. For those still concerned that a global recovery will leave gold behind, precious metals bulls are moving into silver and platinum, which have industrial uses and could stand to gain even if gold lags.

“There is no margin for error in either equities or fixed income” after the surprising resilience of the US market this year, Abby Joseph Cohen, the long-serving strategist at Goldman Sachs, tells Barron’s.

Cohen has been known for consistent bullishness on stocks during most of her four-decade career at the investment bank, but sounds more cautious today. Much of the recent strength is simply due to the Federal Reserve “using monetary policy … to backstop the equity market”, she suggests. Investors are willing to look past a difficult year in the hope of better times by the end of 2021, but “valuation models suggest that the good news is already priced into the S&P500”.

Goldman Sachs’s analysts have a 12-month target of 3,100 for the S&P 500, so the index is now “bouncing around fair value”. US stocks “performed dramatically better” than the rest of the world over the last few months, which is in part due to a higher weighting to technology, but Europe and Japan may do better over the next six to 12 months.

Cohen’s stock picks for the coming year include a firm that should grow strongly on the back of the Covid-19 crisis: Cintas, which provides services such as cleaning, sanitation and personal protective equipment. She also likes Daikin Industries and Trane Technologies, both of which operate in heating, ventilation and air conditioning. These should benefit from increased concerns about indoor air quality, as well as greater demand for cooling due to climate change.

At times of uncertainty, gold is an investor’s “weapon of choice”, says Myra Saefong for MarketWatch. The yellow metal has been on an impressive run this year, breaking through the $1,800 an ounce level last week to hit a nine-year high. In sterling terms gold has long surpassed its 2011 peaks. At £1,436/oz, it is up by 25% in a year.

The Royal Mint’s precious metals division says that sales tripled during the first half, says Shane Hickey in The Observer. Trading apps are helping bring a new generation into the precious metals market: 25-34-year-olds are the “fastest growing demographic”, says the Royal Mint’s Andrew Dickey. It is the monetary backdrop that largely explains the gold surge, Ross Norman of Metals Daily told Saefong. The waves of stimulus unleashed by the Federal Reserve and other central banks to fight the pandemic have sparked renewed concerns that inflation will return and that bond yields could plunge even further south. The result is that gold “seems to have recovered its mojo”.

The yellow metal’s most significant drawback is that it pays no interest, but at a time of near-zero interest rates and negative (or near-negative) government bond yields, not many other safe assets do either. That increases the attractions of one of the oldest stores of wealth. Record low interest rates are not going away, David Coombs of Rathbones tells Jeff Prestridge in The Mail on Sunday, so the rally should have further to go.

How much further? Goldman Sachs thinks the metal will hit $2,000/oz over the next 12 months, reports Callum Keown in Barron’s. With the US engulfed in another wave of the virus it will fall to Chinese investors – the world’s largest retail buyers – to drive the rally higher. The present climate is proving “ideal for gold”.

When markets are down, it’s a good idea to snap up the shares that seemed too expensive when markets were riding high and will, assuming that their prospects remain undiminished, go on to be unaffordable again. On that reckoning, Smithson Investment Trust (LSE: SSON) is a buy.

At its flotation in autumn 2018 it seemed sensible to be cautious. Smithson raised a record £822m, yet popular flotations often presage trouble. Terry Smith, Fundsmith’s founder, had recruited a duo from Goldman Sachs, Simon Barnard and Will Morgan, to run Smithson, which was pitched as “son of Fundsmith”.

But Goldman Sachs is better known for making money for itself than for clients. Fundsmith’s first investment trust, investing in emerging markets, had been a disappointment.

An impressive start...

Nonetheless, in the period from flotation to the end of 2019 it returned 25.5% against the benchmark index’s 11.8%, while the shares continued to trade at a premium to net asset value (NAV). The benchmark MSCI small and mid-cap index reflects Smithson’s mandate of investing in a concentrated portfolio of 25-40 high quality small and mid-cap companies around the world, with market values between £500m and £15bn. This quality is mirrored in portfolio characteristics similar to the Fundsmith Equity Fund: the return on capital is 28%, compared with 11% for the MSCI small and mid-cap index.

The operating profit margin of 32% is four times higher than the index’s, while cash generation is higher and debt lower. As at Fundsmith, the strategy is “buy good companies, don’t overpay, do nothing”. The portfolio had just 29 holdings at the end of 2019, heavily weighted towards information technology (40%), industrials (21%) and healthcare (16%), but just 3% in financials and zero in energy. Around 45% of the portfolio is listed in the US, a surprisingly high 24% in the UK, 20% in Europe and 8% in Australasia. As with Warren Buffett, “our ideal holding period is forever”, though there was “voluntary turnover” – ie, not the result of a takeover, of 6% last year.

Notable among these was last year’s biggest loser, CDK Global. The reasons Barnard gives for the sale of this provider of software for car dealers was “firstly a new chief executive who changed strategy adversely, secondly that the core business wasn’t quite as good as we had previously thought”.

This is as close as a Goldman Sachs alumnus ever gets to admitting a mistake. Other poor performers, including Chr. Hansen (food ingredients) and Fever-Tree (soft drinks) are still held. Barnard believes that while Fever-Tree’s UK business is mature, strong growth will continue elsewhere.

... and a promising outlook

The winners far outweigh the losers. Ansys, a leading company in the field of engineering simulation software, rose 80% last year. Halma, a provider of safety and healthcare equipment, is “a very rare breed in the corporate world: a good acquirer”.

Fisher & Paykel Healthcare designs and manufactures equipment for respiratory and acute care and has seen a surge in demand, while Ambu has seen demand for its disposable endoscopes rise 70% year-on-year.

These and the other companies in the portfolio are growth businesses and appropriately priced; “reassuringly expensive”, as an advertising slogan once quipped.

In the first quarter, the net asset value dropped by 9%, much less than the 28% fall in the MSCI index. The share price fell by 11%. There are days when the shares trade at a small discount to NAV. This is as good as it gets; if you don’t buy now, you never will.

Is China a safe-haven? Stocks in the country where the coronavirus originated have dodged the worst of the falls on Western indexes. The Shanghai Composite index is down by less than 10% since the start of the year, compared with 29%-33% losses in the US and Europe.

China is gradually getting back to work but with tough restrictions, say Ryan McMorrow and Qianer Liu in the Financial Times. Employees often have their temperatures taken multiple times per day and most companies are only allowing about half of their workers back into the office. Compulsory face mask wearing remains common.“Halting the world’s second-largest economy has proved easier than restarting it,” writes Keither Bradsher in The New York Times.

Most factories have reopened but are operating at two-thirds of their capacity, while tens of millions of workers remain in quarantine or stuck in other towns. Early data hints at the severe impact of the country’s “vast containment efforts”. Industrial production, retail sales and investment all dropped by double-digits during the first two months of 2020 compared with a year before.

China may now be on course for its first quarterly contraction since 1976. This week Goldman Sachs predicted a 9% plunge in first-quarter economic activity in the wake of the shutdown.

“Investors seem to be betting that the crisis in China is mostly over,” says Jacky Wong in The Wall Street Journal. The “relative isolation” of the country’s financial system has also insulated its stocks from the global sell-off; just 2.1% of equities are in foreign hands.

Yet that optimism appears misplaced. The disease may yet flare up again as restrictions are relaxed. As the world’s largest exporter China cannot dodge the incoming global demand hit as other countries bring in lockdowns, nor supply chain disruptions coming from abroad. China may have contained the epidemic for now, but “the economic consequences will... continue to widen”.

"When Roger Williams got his turn at the microphone earlier this month, his question for the bank CEOs lined up before the House committee on financial services seemed an unusual one to put to seven sharp-suited financiers. "Are you a socialist or are you a capitalist ?" the Texas Republican asked each of them, from Citigroup's Mike Corbat to David Solomon of Goldman Sachs."

From "Capitalism keeps CEOs awake at night" by Andrew Edgecliffe-Johnson in The Financial Times, 23 April 2019.

To answer Congressman Williams' question, it depends on whether those banks are making healthy profits (in which case: "capitalists, hell yeah") or requiring bailouts from US taxpayers ("socialists, please because we're all in this together"). Or perhaps the most honest answer, to which Eamonn Butler alludes in our most recent podcast, is "crony capitalists, or corporatists".

To paraphrase Marx, free market capitalism won the fight against all comers, notably socialism, and yet mysteriously almost everywhere man is in chains. This is largely because free market capitalism throughout the developed world is today more honoured in the breach than in the observance. This holds whether the "free market" in question is in the US, where Jamie Dimon can earn $30 million a year as chairman and CEO of JP Morgan Chase (it helps bankers to earn effortless profits when their organisation's borrowing costs are effectively zero), or in the UK, where the so-called Conservative Party, when it isn't botching Brexit, is engaged in some kind of race to introduce as much intrusive regulation as parliamentarily possible, or in France, where a Jupiterian' President Macron has managed to alienate growing numbers of gilets jaunes with an imprudent mix of tax rises for fuel consumers but tax breaks for the wealthiest see Jeremy Harding's excellent long form piece for the LRB.

The screenwriter William Goldman famously began his autobiography, Adventures in the Screen Trade, with the words "Nobody knows anything". And nobody seems to learn anything from history, governments least of all. This is the central message of Eamonn Butler and Robert Schuettinger's Forty Centuries of Wage and Price Controls: how not to fight inflation. You can download a free PDF copy from the excellent Mises website.

As the title of Forty Centuriesshould make abundantly clear, the first instinct of government is always to try and control prices. It never works. Even when it appears to work, it alwaysleads to second-order effects which require further intervention, which gives rise to further effects, in a death-spiral of illogic and footling bureaucratic interference.

As David Meiselman asks in his introduction to Forty Centuries,

"What, then, have price controls achieved in the recurrent struggle to restrain inflation and overcome shortages ? The historical record is a grimly uniform sequence of repeated failure. Indeed, there is not a single episode where price controls have worked to stop inflation or cure shortages. Instead of curbing inflation, price controls add other complications to the inflation disease, such as black markets and shortages that reflect the waste and misallocation of resources caused by the price controls themselves. Instead of eliminating shortages, price controls cause or worsen shortages. By giving producers and consumers the wrong signals because "low" prices to producers limit supply and "low" prices to consumers stimulate demand, price controls widen the gap between supply and demand.

"Despite the clear lessons of history, many governments and public officials still hold the erroneous belief that price controls can and do control inflation. They thereby pursue monetary and fiscal policies that cause inflation, convinced that the inevitable cannot happen. When the inevitable does happen, public policy fails and hopes are dashed. Blunders mount, and faith in governments and government officials whose policies caused the mess declines. Political and economic freedoms are impaired and general civility suffers."

"General civility suffers" might be the perfect summary of our dysfunctional politics in 2019. Whether in the form of Brexit, President Trump (or Ukraine's newly elected President Volodymyr Zelensky) or the gilets jaunes, traditional political parties are struggling to remain relevant to an increasingly cynical and angry electorate. As LRB reader Jon Harry writes in response to Jeremy Harding's piece, what's remarkable in France is

"the complete failure of both the extreme right (the recently renamed Rassemblement National) and the extreme left (Mlenchon's France Insoumise) in their attempts to infiltrate and recuperate the gilets jaunes. Not unlike much of the support for Brexit, the movement is a massive and simultaneous rejection of all current political offerings."

As for us, we trace this widespread disenchantment amongst electorates back to already socially divisive economic policies that were then supercharged by monetary authorities' emergency' response to the Global Financial Crisis. The financial reckoning has been almost Biblical. Matthew 13:12:

"For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath."

QE [quantitative easing] and ZIRP [zero-interest-rate policy] have turned out to be potent wealth generators for the already asset-rich. For those without any assets to speak of, good luck saving your way into prosperity now.

It has taken a decade, but the shock waves from the collapse of Lehman Brothers and all those arbitrary bailouts for crony capitalists bound up within the GFC [great financial crisis] and its central bank-sponsored aftermath have finally reached the shore. Turns out socialism for the rich doesn't play well with electorates who have failed to experience any meaningful upswing in their own standard of living for several decades.

Could things have gone differently? Those in the West, or at least its politicians, have forgotten the lesson of Hong Kong where Sir John James Cowperthwaite was Financial Secretary between 1961 and 1971. Wikipedia takes up the story:

"He arrived in Hong Kong in 1945 and was assigned to the Department of Supplies, Trade and Industry. He was asked to find ways in which the government could boost post-war economic outlook but found the economy was recovering swiftly without any government intervention. He took the lesson to heart and positive non-interventionism became the focus of his economic policy as Financial Secretary. Cowperthwaite built on the economic policies of his predecessors, Arthur Clark and Geoffrey Follows, promoting free trade, low taxation, budget surpluses, limited state intervention in the economy, a distrust of industrial planning, and sound money. It was a policy mix that drew more on Adam Smith and Gladstone than on Keynes and Attlee. However, Cowperthwaite was a pragmatic civil servant rather than a theoretician and he based his policies on his experience, empirical data and what he believed would work in practice.

"He refused to compile GDP statistics arguing that such data was not useful to managing an economy and would lead to officials meddling in the economy. He was once asked what the key thing that poor countries could do to improve their growth. He replied: "they should abolish the office of national statistics." According to Catherine R. Schenk, Cowperthwaite's policies helped it to develop from one of the poorest places on earth to one of the wealthiest and most prosperous: "Low taxes, lax employment laws, absence of government debt, and free trade are all pillars of the Hong Kong experience of economic development." The Economic Freedom of the World 2015 Report ranks Hong Kong as both the freest economy in the world, a distinction it has held since this index began ranking countries in 1975, and among the most prosperous."

The allure of Asia as an investment destination has not dimmed during the past half century. Indeed, the slow relative decline of the West over the same period coincident, for example, with Britain's membership of the EU makes Asia an even more compelling platform for wealth generation today.

The map below a recurrent favourite of ours shows in solid green the size of middle class populations by geographic region. Around each circle there is a wider blue circumference, which represents the forecast size of that region's middle class population by 2030, as forecast by the OECD.

Growth of middle class populations by 2030

Source: OECD forecasts.

To summarise: the size of the US middle class doesn't grow much, because the US is already a mature economy. Neither does that of Europe (though in the case of Europe, one is also advised to be sceptical as to likely economic growth the region now feels like it is tipping back into recession). South America and Africa's middle classes grow a reasonable amount. Then look at Asia, where the size of the middle class is forecast to grow from 500 million to three billion people by 2030. If this comes to pass it will be the greatest creation of wealth in human history.

And yet much of Asia remains, to a stock investor, inexpensive. Our core Asian fund investment, Samarang Asian Prosperity Fund, sports the following metrics:

Average price/earnings ratio: nine times Price/book ratio: 0.9 times Historic return on equity: 16% Average dividend yield: 4.4%.

Since inception in November 2012, Samarang Asian Prosperity Fund has generated (in US dollars) a return of 102.7%. That is more than double the return of MSCI Asia ex-Japan over the same period (46.7%).

Westerners may have forgotten the lessons of Hong Kong. Their counterparts in Asia, and especially Japan and Vietnam, don't appear to have done.

www.pricevaluepartners.com @timfprice

Tim Price is co-manager of the VT Price Value Portfolio and author of Investing through the Looking Glass: a rational guide to irrational financial markets'. You can access a full archive of these weekly investment commentaries here. You can access the archive of our regular State of the Markets' podcasts, with Paul Rodriguez of ThinkTrading.com, here.

Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.

And where investment banks go, others tend to follow...

Investment bank Goldman Sachs is putting its money into prefabricated houses: dwellings that are put together in a warehouse and then delivered to their destinations fully formed. Goldmanhas decided the prefab industry is worth a$75m investment.

Modular housebuilding is not exactly new to the UK: we tried it in the aftermath of World War II in an attempt tomeet the urgent demand for housing.Yet today's prefabs are, thankfully, more stylish as well as more energy-efficient. The idea is that if production is increased, prefab housing could go some way towards meeting the 300,000 houses-per-year target the government thinks we must reach in order to keep up with demand.

Unfortunately, the UK is far behind other countries in adopting the trend. In Sweden, around 84% of houses are built using prefabricated elements, according to Forbes. This proportion is 20% in Germany, while in Japan more than 15% of houses are built in factories. In the UK, only 15,000 (7.5%) of the near 200,000 houses constructed in 2017-2018 were prefabs. The government wants to increase that figure to 100,000.

But despite the slow start, there are signs that the idea is taking off. The company Goldman has invested in TopHat says it can build three flats a day from its site in south Derbyshire. Its first project is to build 300 houses in Kent.

And Goldman isn't the only big name showing an interest in the sector. Financial services company Legal & General has its own modular homes division, with a factory in Leeds that has the capacity to produce up to 3,000 prefab houses per year. Ilke Homes, based in Yorkshire, says it can build eight houses a day these properties would cost 20% less to heat than traditional new-builds.

It remains very difficult for people to invest directly in modular housing (although Amazon, Google and the UK's Berkeley Homes are all dipping a toe into the sector).And there are certainly still hurdles to prefabs going mainstream. For one, the construction cost per unit is 12% higher than with normal building methods, so housebuilders are reluctant to embrace the option; and there is a limit to the size of a property that can be transported on the back of a lorry. However, it is when big investors begin putting up cash that problems like these miraculously start getting solved.

Last year was not a happy one for investors in base metals. The GSCI Industrial Metals index slipped by around 15% from its year-high in June, and the gauge lost another 7% from mid-December to January.

It may have bounced since, but don't expect a sustained revival, says Capital Economics. Base metals prices are likely to weaken as the Chinese economy keeps slowing. The gold price rebound, however the yellow metal is now above $1,300 for the first time since last summer does look sustainable.

Central banks are stocking up

The key theme here is a need (especially among emerging- market central banks) to diversify currency reserves away from dollars, to which they tend to be highly exposed. This has been the case for several years, but geopolitcal tension seems to have accelerated the trend. There should be plenty more demand from this source over the longer term. As Swaha Pattanaik points out on Breakingviews, China's economy accounts for almost a fifth of global GDP but its currency makes up less than 2% of central bank reserves. "Reserve managers may not know how long it will take for China's currency, or the euro, to nibble away at the dollar's pre-eminence." But they are beginning to shift away from the US currency.

Gold's reputation as a safe haven is also coming to the fore now that markets have become more volatile and the political backdrop less predictable. In this context, it's interesting to note that Azerbaijan's sovereign wealth fund, SOFAZ, is set to double its gold holdings to 100 tonnes in 2019 after resuming purchases followinga five-year break, notesZulfugar Agayev on Bloomberg. The fund's executive director Shahmar Movsumov says the fund wants "something that is not someone else's credit risk. In a world where you see the changes in geopolitics and in the dynamics between superpowers and their imminent impact on the financial sector, you want to be on the safe side".

The SOFAZ fund won't be alone: the holdings of gold-backed exchange-traded funds have hit a near-six-year high as investors have warmed to the precious metal, notes Capital Economics. The possible return of inflation (see page 4) is another reason to hold gold. One easy way to bet on the gold price is through the ETFS Physical Gold exchange-traded fund (LSE: PHAU), which tracks the spot price .

Devote an afternoon to some simple money administration, and you could make a big difference to your finances over the year.

As it's the new year, many of us will be embarking on a new diet or fitness regime, hoping this will be the year we finally transform ourselves. But take the same energy and desire for change and apply it to your finances and you could be much better off by the time next Christmas rolls around.

First, consider moving your savings to the new personal banking arm of Goldman Sachs, Marcus (named after founder Marcus Goldman), and you could significantly improve your returns. The instant-access savings account pays 1.5%, compared with an average of 0.63% for no-notice savings accounts. And don't forget your individual savings account (Isa) allowance. Virgin Money is paying 1.45% on its instant-access Double Take E-Isa. Isa transfers are accepted into the account, but you can only make two withdrawals a year. Longer term, Investec offers 2.35% on its two-year fixed-rate savings account and Atom 2.4% over three years.

If you've run up credit-card debt in 2018, move it onto a 0% balance-transfer card and you could save hundreds of pounds in interest. Santander is offering a 27-month interest-free balance transfer card with no fees. Shift £2,500 onto the card and you would save £272 in a year compared with the 23.1% annual interest rate on the average credit card (assuming repayments of £250 a month).

January is the busiest month for divorces. You might want to break up with your bank and find a current account that better suits your needs. For those of you with a healthy balance in your current account, Nationwide's FlexDirect account pays 5% interest on up to £2,500. Check if any friends have the account because if they refer you, you will both receive £100 when you switch.

And if you dip into the red occasionally, opt for First Direct. You get an interest-free £250 overdraft plus a £125 switching bonus if you go via comparison site MoneySavingExpert (or £100 if you go direct).

Finally, don't assume the new energy price cap means you can rest on your laurels. As many as 60% of the fixed-rate deals on the market come in cheaper than the cap, according to Compare the Market. So take some time to check that you're getting the best deal.

Financial dates for the diary

1 January The energy price cap came into effect at the beginning of this month. This means the bill for a typical dual-fuel customer paying by direct debit cannot exceed £1,137.

31 January Deadline for filing your tax return and paying what you owe.

1 March Broadband providers will have to start providing a minimum guaranteed speed when you sign up.If they fail to provide that speed for a month, you can switch without penalty.

5 April This is the last day of the 2018-2019 tax year. Use up your Isa and pension allowances before midnight.

6 April The Personal Allowance (how much you can earn tax-free) rises from £11,850 to £12,500. The 40% income tax threshold rises from £46,350 to £50,000, except in Scotland.

6 April The total minimum amount paid into workplace pensions will rise from 5% to 8%. State-pension payments will rise to £168.60 a week for those who retired after April 2016, and to £129.20 for those on the old basic state pension.

The pension lifetime allowance rises from £1,030,000 to £1,055,000. The annual allowance stays at £40,000.

1 May NS&I will move the inflation measure for its index-linked savings accounts from RPI to CPI. The latter is generally lower, so returns will dip.

1 July Mobile phone providers must make switching easier. There will be a ban on charges for notice periods and you will be able to start the switch process with a text.

29 August deadline day for PPI claims.

30 November Help to Buy Isas stop being available to new savers. If you already have one, you'll be able to keep paying into it for another decade, and you'll need to claim the bonus by 2030.

Hedge fund manager Paul Tudor Jones, who predicted the October 1987 crash, believes the stockmarket will rally later this year, even in the face of tightening monetary policy. "I think we'll see rates move significantly higher beginning some time late third quarter, early fourth quarter," Jones told CNBC, but "the stockmarket also has the ability to go a lot higher at the end of the year... I can see things getting crazy, particularly at year-end after the mid-term elections... to the upside." The move higher, however, will not be sustainable eventually, rising inflation and interest rates will lead to a recession.

Moreover, the state of America's balance sheet means that President Donald Trump's stimulative fiscal policy isn't sustainable either, Jones said during a conversation with Goldman Sachs CEO Lloyd Blankfein, notes Yahoo Finance. "We're going to have to mean revert to a normal real rate of interest with a normal term premium that's existed for 250 years... That probably means the price of assets goes down in the very long run." The danger is that, come the next recession, there will be little left in the pot to enable the government or central banks to offset the downturn. "We'll have monetary policy, which will exhaust really quickly, but we don't have any fiscal stabilisers."

That's all further down the line. For now, though, Jones doesn't have significant exposure to the financial markets, mainly because he sees a quiet period ahead. "We're getting ready to go into a summer lull... I like to have significant leveraged positions when I think there is an imminent price move directly ahead."

When a public company issues new shares it needs to know how much money it will raise. In an open market there is no way of knowing this for sure as on the offer day there may be more or less demand for the shares and this will influence the number sold. One common way to guarantee a minimum level of proceeds is for the issuing firm to involve an underwriter.

This is usually an investment bank, such as JP Morgan or Goldman Sachs. In exchange for a fee usually a percentage of the amount raised they commit to buy up any shares that are not taken up on the offer day by other buyers. As such they are acting as a kind of insurer, hence the term underwriting. In most cases the bank will hope to take the fee and not have to buy any shares, assuming an offer is popular. However, if the issue price is too high they may end up owning a block of shares.

Born in 1915, Paul Samuelson got his degree in economics from the University of Chicago, followed by a PhD in economics from Harvard in 1941. He worked at the Massachusetts Institute of Technology from 1940 onward, becoming a full professor in 1947. He went on to win the Nobel Prize for Economics in 1970, while his introductory economics textbook, first written in 1948, has gone through 19 editions. Samuelson would play a key role in founding Commodities Corporation in 1969. He died in 2009 at the age of 94.

What was his strategy?

Publicly Samuelson was one of the key people involved in the development of the efficient market hypothesis, which argued that markets reflected all publicly known information, which means that it's impossible for fund managers to beat the market. He therefore suggested that someone should set up a low-cost fund that just tracked the market instead. Commodities Corporation, which was set up by Helmut Weymar, hired top computer scientists and traders to discover patterns in the market, which they would then exploit.

Did it work?

Samuelson's 1974 article about indexing, "Challenge to Judgement", persuaded Jack Bogle to set up the first retail index fund two years later. Thanks to Samuelson and Bogle, a third of all mutual fund money is now managed passively. Commodities Corporation rose in value by more than 100 times in its first 20 years. It was acquired by Goldman Sachs in 1997.

What was his best trade?

At the same time as he put $125,000 into Commodities Corp., Samuelson invested a lot of money in Warren Buffett's Berkshire Hathaway. This proved to be a good investment since between 1970 and 2009 each $1,000 invested in its stock would have become $2.12m, an annual return of more than 20%. As a result, Samuelson made more money from investing than he did from his writing or his work as an economist.

What lessons does he have for investors?

Samuelson's public support of indexing contradicts his more private support of hedge funds and active management. But what this contradiction points to is that not even the strongest supporters of the efficient market hypothesis are fully convinced that it always quite works like that in the real world that it is at times possible to beat the market. This suggests that, even if you haven't got the time to trade or pick stocks yourself, you can still do well if you find someone who can.

From an investment point of view, I must confess I have been wrong-footed by the Donald Trump win.I had a bet on him, so that was a nice win (almost a five-bagger). But the reaction since then that, I did not see coming.

The stockmarket rally I get, but the sell-off in gold I'm more ambivalent about.And that's the focus of today's Money Morning

Why I sold gold when Donald Trump won

The fact that Trump is not in bed with Wall Street, doing highly-paid speeches for Goldman Sachs and all the rest of it, might have led one to think the stockmarkets would react badly to a Trump win, but the fact that they have rallied is not that much a surprise.

Focusing on what Trump has said, his policies increased infrastructure spending, deregulation, lower taxes and so on are actually business-friendly, which is what you would expect from a businessman.

Nor has the sell-off in bonds been such a surprise at least in retrospect. On the one hand, his infrastructure spend will need to be paid for somehow, so that means more debt. On the other hand, he attacked the low-interest policies of his predecessors and of the US Federal Reserve during his campaign.

It's also worth reminding ourselves that the sell-off in bonds actually began in the summer. The decline, which follows Trump's election, is the continuation and acceleration of a trend that was already in place. Such has been the noise about bonds, it may even be that the sell-off is done, at least in the short term.

So what's going on with gold? Given Trump's unpredictability, you might think gold would have reacted more positively than it did. And I do think that you can make the case that the sell-off in bonds is related to the sell-off in gold. If the market is factoring in higher rates, perhaps that is what is motivating sellers.

But last week the selling was just brutal. We saw almost $130 an ounce knocked off the gold price in just three days.

I was one of those selling.

I made quite a nice call on gold a month or so ago, and made some good gains. I didn't want to see those gains turn into losses, so I was taking profits wherever I had them.

I closed my spread bet. I sold some of my more liquid gold stocks.

And then I thought: "I have had a good year in gold stocks, and I don't want to give back the gains I made". So my selling became increasingly aggressive by early on Friday.

At one point, I was even on the verge of selling some of my physical gold.

The gold price is reported in dollars, so we tend to think about the dollar price of gold. But, in fact, in the UK we should be thinking about the sterling price of gold. Sterling is what we will use to buy gold, and when we come to sell, sterling is what will receive in exchange, in most cases.

Sterling gold is up over 45% this year. It has broken the £1,000 an ounce barrier for the first time since early 2013. I want to protect the gains that I have made.

I was looking at the chart and thinking: that wants to go back below £900.

Anyway, I didn't. I decided I was being too emotional and walked away. It is better to sell from a position of strength.

Time to wait for the next "buy" signal for gold

From a shorter-term perspective, I have now sold enough and built up a big enough cash position to wait for the next buy signal.

Gold has buckets of support in the $1,200-$1,230 area. It made its March and May lows there earlier in the year. The relative strength index is below 30 meaning it is coming into the "buy" zone. Gold stocks were up 5% yesterday while gold was stable that is often a bullish divergence.

So it's very possible that gold could be making an intermediate-term low in these parts. If I sold everything now and it turned around and rallied, I'd feel like a right bozo.

The fundamental reason I own gold is that it is my hedge against governments. From a political upheaval perspective, 2016 has been the year that keeps on giving. I don't see that changing. For all the volatility, you want a considerable long-term core position.

But this whole episode has been a valuable lesson in how, once you get swayed, it is very easy to get carried away.

I'm now comfortable with my position. From a risk-management point of view, I want to have some physical gold, some cash and some stocks. I have that.

But I want to see clearer signs before I go all in again. I don't have that. Gold and gold stocks are still on a short-term "sell" signal for me.

I'm watching and waiting for my indicators to turn, and then I'll go back in. If that means buying at a slightly higher price than I sold annoying, but so be it. If it means buying at a lower price, all the better.

As I'm sure you're aware, there's been some interesting activity in the gold market of late. Despite the lack of tapering and fundamentals screaming for a higher price progress to date has been somewhat muted. At the close on 1 November, the price reads $1,307.

Needless to say, we're still contrarian investors. And there are plenty in the market trying to talk the price down. Goldman Sachs recently went out on a bit of limb predicting a fall in the gold price to $1,144 per ounce in 2014. But their rationale for lower prices looks feeble.

It rests on improving US economic data, rising real rates and tapering of quantitative easing (QE). I don't see any of those things happening (and I don't think the market does either).

There are now so many elephants in the room we're starting to run out of space! Soaring demand from China, India and Russia. No tapering of QE on the horizon (in fact, it looks like they'll probably print more). Falling gold supply. And finally, gold pouring out of the Comex and exchange-traded funds (ETFs).

But the story in gold right now is the delicate balance between demand and supply. And in particular, some recent analysis from Sprott Asset Management that really set the cat amongst the pigeons.

Sprott's analysis is based on the global supply and demand of gold. Basically, it accuses Thomson Reuters and the World Gold Council (WGC) of understating the gold supply shortfall relative to gold demand. Here is its analysis:

Source: Sprott Global

This is incredible. It's estimating total demand for this year of 5,184 tonnes against mine supply (excluding China and Russia who don't export any of their production) of just 2,142. Adding back scrap and ETF outflows, we get to 4,403 tonnes which still leaves a chunky 781-tonne shortfall.

In an open letter to the World Gold Council, Sprott said "demand statistics reported by the World Gold Council... consistently misrepresent reality, mostly with regard to demand from Asia."

Now, clearly the World Gold Council and Thomson Reuters GFMS aren't happy. Here's what they had to say:

"The use of import data as a proxy to measure gold demand is somewhat simplistic and does not take into account factors such as round-tripping and stocking/destocking... To effectively measure gold demand, a more detailed holistic analysis is required."

Thomson Reuters GFMS said it stood by its 2013 supply and demand gold estimates. The figures were "based on highly detailed on-the-ground analysis by a large team of analysts based around the world and which are figures supported by experts at the World Gold Council".

I'm not close enough to the information to decide who's right on this. But it's a real eye-opener to read a respected source like Sprott calling the WGC's credibility into question. Anyway, form your own view.

The gold ATMs

Here's a graph showing the movement of physical gold from SPDR GLD (the largest physically backed gold ETF in the world) over the past five years:

Source: SPDR GLD

Holdings have plummeted from 1,353 tonnes on 10 December 2012 to 872 tonnes on 25 October 2013 - a drop of 481 tonnes.

If this decline continues, then this route to physical gold won't be around for very long. With gold increasingly moving east and falling into the strong hands of those with no interest in selling, and more importantly, no need to sell it, it's very difficult to see how the market will cope with ever increasing demand.

I know I keep banging on about it, but when you have a material lack of supply and rising demand, the price is only going to go one way.

You need to know whether gold is good value or not before buying. But how do you value gold? Simon Caufield of the True Value newsletter explains.

What do the Daily Mail, Ed Miliband, Bank of England governor Mervyn King, the TUC, and Vince Cable have in common? They all want you to believe that evil bankers caused the financial crisis. It's a tempting argument bankers do deserve a lot of the flak they're taking. But it's just too convenient.

If it were all down to the bankers, then why was this recession the worst since the Great Depression? Bankers have always been greedy. Their bonuses have always encouraged excessive risk-taking. Lending has been lax at the top of many business cycles. Yet we have not had a crisis this bad since the 1930s.

In truth, central banks caused the crisis. Alan Greenspan messed up during his term as US Federal Reserve chairman. And Ben Bernanke and our own Mervyn King are continuing his mistakes. They don't want you to believe it was their fault. You might then start thinking about the real solution to the problem: abolish central banks; let the markets set short-term interest rates just as they already set longer-term rates.

See also

• How to short government bonds

But that's not going to happen. We are stuck with King and Bernanke. So we have to invest accordingly. And right now there are two obvious investments to make to protect and grow your wealth. You won't be surprised that the first is gold. MoneyWeek has written so much about it that you might think there's nothing new to say. I think there is how would you like to know if it's still a good time to buy? And when you should sell?

I think I can answer those questions.

The second is to short government bonds. Again you won't be shocked. Who would lend money for ten years at 3% to a bunch of politicians? Gilt yields will surely rise but when? I don't know. But I do know how you can profit from rising bond yields without losing money while you wait read more on that here: How to short government bonds.

Alan Greenspan's dreadful mistakes

But first, I'll explain why you need to fear central bankers. Greenspan made three huge mistakes that caused the banking crisis. His first was to bail out hedge fund Long Term Capital Management (LTCM) in 1998. LTCM had borrowed heavily to boost its returns. When it went bust, its lenders stood to lose everything.In rescuing the lenders, Greenspan gave birth to 'Too Big To Fail'.

This changed everything for investment banks. Goldman Sachs, for example, had been a private partnership for 130 years. Partnerships are conservative organisations because their own capital is at risk. Yet Goldman went public within 12 months of the LTCM bail-out. That meant they could borrow to boost profits. And as LTCM had shown, if they borrowed big-time, the Fed would have to rescue them if they got into trouble. Goldman's lenders knew this. So they were happy to lend at ridiculous rates.

Now, investment banking is fiercely competitive. And the cardinal rule is this: if your rival is making tons of money with a particular trade, you'd better do the same if you want to keep your job. So the rest of the sector followed suit.

Mistake number two was repealing the Glass-Steagall Act. Passed in 1933, it was meant to prevent another Great Depression by separating investment and commercial banks. Of course, it was the US Congress that repealed it in 1999, but that was with Greenspan's tacit approval. Now commercial banks could trade like investment banks, using savers' money.

All that was needed now was somewhere to invest all that borrowed money.

Cue mistake number three. Greenspan kept interest rates too low for too long after the dotcom recession. Bernanke maintained the policy after he became Fed chairman in 2006. Both argued that low rates were justified because inflation was low. Bernanke called it 'The Great Moderation', and took credit for it. He should have known better. Inflation was only low if measured by consumer prices. China and India caused low inflation, China using cheap labour to cut the prices of manufactured goods and India cutting the cost of services. China also bought US government bonds in huge quantities. This kept the dollar strong so that its exports would remain cheap. This flooded the US with money, which via the banks went into the housing market.

Other inflation signs were flashing red. The economy boomed. The gold price rose after falling for 21 years. The money supply grew. House prices went through the roof. The level of debt exploded. But Greenspan and Bernanke did nothing. So bankers knew exactly where to invest all their borrowed money, safe in the knowledge that they would always be bailed out by the Fed.

It's still going on today. Bernanke and King maintain rates at record lows (are they really saying that this is still a once-in-300-years emergency?) and have been printing money to buy their own governments' debts. Meanwhile, Japan, South Korea, Taiwan, Brazil and Switzerland have all intervened in the foreign-exchange markets to weaken their currencies. The last Fed statement left no doubt that they too want a lower dollar.

This time, the money seems to be going into bonds, emerging markets and commodities. And zero interest rates are tempting investors to gear up all over again. It's an echo of 2003-2007. I think it will end badly. But I doubt that it'll be exactly the same ending as last time. In 2008, I made a lot of money in government bonds. I don't think they'll be a safe haven this time. Quite the reverse.

A value investor's guide to gold

Gold is the currency of last resort. So it should be the perfect antidote to central bankers trying to undermine paper money. But is it still worth buying today? And how do you know when to sell?

As a value investor, I like to buy assets that are priced well below their true value, then sell when they reach full value. So these questions are vital to me. My main goal is to preserve my capital, so I like to diversify my portfolio with defensive assets. Gold is one of very few options these days. But I could not bring myself to buy without a valuation. So I set about developing one. I asked myself this question: if central bank policies are the problem, what's the best way to measure how sound they are?

I decided to look at the level of interest rates relative to inflation.

Look at the chart above. The black line shows the month-end price of gold from 1979 to today. The red line shows US real interest rates that is, the interest rate on three-month Treasury bills (US government bonds) minus annual consumer price index (CPI) inflation. Look first at the long period in the middle of the charts. For 21 years, real rates stayed above zero, except for four months in 1992 when they were very slightly negative. The gold price fell from $680 per ounce in late 1980 to $270 at the end of 2001. It fell fastest when real interest rates were at their highest.

Then consider 2002 to the present day. Real rates have been negative for most of that time. Gold has soared to $1,300. But it's not been a smooth ride. Gold stagnated in 2006 when rates were briefly positive. It also fell back in 2008 when real interest rates again briefly turned positive. Finally, look at the left-hand side. Real rates were negative for the whole of 1979. Gold exploded from $230 per ounce to $680 in January 1980.

Then there's a choppy period of six months in 1980. Real rates turned positive for three months. So gold fell below $600. Then real rates fell below zero for another three months. Gold regained $680.

When will the gold rally end?

The chart below plots the same data. The rolling 12-month change in the gold price is on the vertical axis. Real interest rates are on the horizontal. Each blue dot represents one month. The red line is the trend. Look at the bottom left-hand corner. There are no blue dots. In other words, in all 381 12-month periods, the gold price never fell when real rates were negative. Look also at the bottom right hand corner. Large falls in the gold price happen only when real rates hit 2%.

This analysis has its limitations. There are lots of points off the trend line. So the model does not explain everything that's going on. And there's no guarantee that my model built on past data will always work in the future. But it's the only way I've found to decide when to buy and sell gold. And what it tells me is that the gold price rises when US real interest rates are negative. Today, they are 1% (interest rates are close to zero and US inflation is 1%). So you can still buy gold here. But watch the Fed like a hawk. If Bernanke lifts interest rates above the rate of inflation, that will be your signal to dump gold.

The best way to buy gold

My favoured way to buy gold is via the ETFS Physical Gold £ ETF (LSE: PHGP). It owns gold bars stored in a secure HSBC-owned vault. Each bar has a unique serial number and is allocated to its owner, so there's little counter-party risk.

Simon Caufield writes the True Value newsletter, which sets out his plan to grow your wealth at an average of 15% a year. True Value is open to new subscribers, but only until 10 Dec. Visit www.moneyweek.com/tv.aspx ; or call 020-7633 3780. (True Value is a regulated product issued by MoneyWeek Ltd.)

This article was originally published in MoneyWeek magazine issue number 509 on 22 October 2010, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don't miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.