Cover of MoneyWeek magazine issue no 862, Friday 15 September 2017

Phil Oakley on how to spot toxic stocks before it’s too late

13 September 2017 / Issue 862

The year has thrown up more than a few nasty surprises for investors, but learn to read the warning signs and you can sidestep potential hits from the market, says Phil Oakley. Read this week’s cover story here.

• What Brexit means for farmers
• The PR star whose firm fell to earth
• The musical instruments that are worth millions

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Merryn Somerset WebbEDITOR'S LETTER

Merryn Somerset Webb

A few weeks ago, we wrote that there was starting to be something of the 1970s about the UK. The sense of deja vu is rising. This week, we learned that Consumer Price Index inflation (the government’s favoured measure) is at 2.9%. The Retail Price Index – the one the government tells us is deeply flawed, but which they still use to benchmark student loans, rail fares and index-linked gilts – is at 3.9%. At the same time, the threat of industrial action is growing.

Theresa May’s government is to partly lift the 1% public-sector pay cap (even although taxpayer-funded public-sector compensation remains firmly above the private sector’s). This has done her little good. The chair of the Police Federation of England and Wales reckons his members will be “angry and deflated”. Three of our biggest unions see a “strong likelihood” of co-ordinated strike action, and Labour leader Jeremy Corbyn won’t say whether he would back illegal strikes or not. It is, he says, “a matter for the unions”. Weak government, low growth, high debt, persistent inflation and and an aggressive dollop of strike action about to be chucked into the mix. Not encouraging.

On the plus side, it allows us to pluck one near-certainty out from the current confusion: UK wage growth is set to rise. Unemployment is at a 42-year low, workers are irritable, and every employer I talk to tells me they are having trouble hiring. That means they either have to get a lot of robots in very fast indeed (google “strawberry-picking robot”), or they have to raise wages. The former will happen, but the latter will happen fast. Most economists reckon that UK inflation will soon fall back to the 2% level that the increasingly hapless-looking Bank of England is meant to target, as post-referendum sterling weakness passes. Don’t bet on it.

For investors, this makes it more vital than ever that your portfolio is as resilient as can be. Don’t hold shares in companies that might have to cut their dividends just as you need real income (dividend cover in the FTSE 100 is very low). Don’t hold any that are covering up a lack of growth with aggressive accounting or long-term destructive acquisitions (de-merging, focused companies might be better). Don’t own any with low levels of pricing power in a global market. And you certainly don’t want any with dimwits as managers (just look at the story behind Provident Financial’s downfall). See our cover story for more on how to avoid market villains.

Finally, whatever the inadequacies of fiat money (inflation and inevitable long-term failure) I have one final near-certainty for you: if you invest in a fund that invests in crypto-currencies, you will be sorry.