21 May, 2012
- Worried about Greece? Here’s how to protect your wealth
- Invest in water to grow your portfolio
- How to use stock ratios to predict the future
Yesterday’s close: FTSE 100 down 1.3% to 5,267... Gold up 1.19% to $1,592.99/oz... £/$ - 1.5817
From John Stepek, across the river from the City
Did you make it to the MoneyWeek 2012 conference on Friday?
It was a great day – if you didn’t make it, I hope you’ll be able to come next time.
There were plenty of interesting talks, on everything from the next big emerging markets, to the outlook for gold.
But the one question that was on almost every attendee’s lips was: what’s going to happen in Europe?
My gut feeling, I said, was that Greece would default and leave the euro. But the question of when, and just how chaotically, is impossible to predict. And unfortunately, that’s the bit that will have the most impact on investors.
So how can we deal with this sort of uncertainty?
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The heart of Europe’s problems
There’s an interesting interview in US financial paper Barron’s this week with Ray Dalio, who seems to be the latest guru investor that everyone’s fallen in love with.
Dalio is head of Bridgewater Associates, which is the world’s largest hedge fund group. You can read our profile of him here. For now, suffice to say he has a decent track record and takes a big picture view of things.
Inevitably, the Europe question comes up in the interview. Dalio doesn’t say anything especially new. That shouldn’t be a surprise. There isn’t much more to say.
Europe’s fundamental problem is self-evident. It has 17 nations sharing a currency, but almost nothing else. When economies diverge from one another to the extent that Germany and Greece do, the only way they can comfortably share a currency is if Germany is prepared to pay for Greece when it inevitably runs into trouble.
That takes us to where we are now. Europe has to “decide whether it wants to create a sufficient central government… that has the ability to collect taxes from the whole and the ability to issue debt that obligates the whole, or whether it does not,” as Dalio puts it.
Of course, the other big question is: will it even get a chance to make a considered decision on this? Or will it collapse first?
Dalio reckons there is “maybe a 30% chance in the next six-month to two-year period of a really bad shock from Europe.” However, that would probably lead to more money-printing, and another rally.
But he can’t know for sure, of course. Nor can any of the rest of us. And this is a point that Dylan Grice of Société Générale addressed at the conference on Friday. None of us can tell the future – something that the history of punditry and investment, from Japan to the tech bubble, makes clear.
And yet, we need to make a choice about what to do with our savings. So given the disparity between these two outcomes – which still boil down even now to inflation versus deflation – what should you do?
How to protect yourself from a ‘disorderly’ Greek exit
The best bet just now is to be positioned defensively. If the best-case scenario (from a short-term investment perspective) happens, and Europe prints money, you’ll have time to get on board the rally. The gains won’t all happen in a single day.
Alternatively, if Greece manages to pull a Lehman Brothers-style exit on us all, then you won’t be as badly exposed as if you had been ‘all-in’ before the crash.
So I still like income-producing blue-chips in the UK and the US, although if you plan to buy in now, make sure you’re getting a decent yield (I’d want at least 5% on the UK names). Corporate bonds are an option on this front too.
As the cheapest major stock market, I still like Japan. It’d benefit from any rebound in risk sentiment along with other markets.
Hold a good chunk of cash too. Cash-destroying levels of inflation are not yet upon us, so you can afford to keep some powder dry to deploy if and when the big bust comes.
And I’d hold gold as insurance. Somewhat reassuringly, Dalio agrees with us on this point. While he thinks it could be in for a “bumpy ride”, he reckons that “most people should have in the vicinity of 10% of their assets in gold”, partly as “a very effective diversifier against the other 90%.”
As for ideas on what to buy if there’s a major plunge, as I noted the other day, my colleague Phil Oakley has written about some solid names to keep an eye on in the magazine this week.
Also, David Stevenson gave an eye-opening talk about small-cap value stocks at the conference on Friday. David reckons they are among the most under-rated investments in the world today, and came up with some very significant numbers to prove it. You can find out more about his newsletter, The Fleet Street Letter, here.
If you weren't able to attend the conference then don't worry as we recorded the full day including all the keynote speeches and breakout sessions. I've been told that this will be available in the next couple of days but will only be available for a limited period of time. I'll let you know more as soon as I hear it.
Got a comment on this article? Leave a comment on the MoneyWeek website, here.
Until tomorrow,
John Stepek
Editor, MoneyWeek
Our recommended articles for today...
Invest in water to grow your portfolio
- The world is increasingly short of useable water. Firms that can solve the problem will create profit flows for investors, says James McKeigue. Here, he picks the best ways to invest in water: Invest in water to grow your portfolio.
How to use stock ratios to predict the future
- Depending on the nature of the stock, you need to pick the right ratio to see whether it's cheap or not, says Tim Bennett. Here, he explains some of the most popular ratios: How to use stock ratios to predict the future.
And for Friday’s market update, see below...
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The Price Report is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.
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Market update
Click here for the latest stock market news and charts.
The FTSE 100 took another battering on Friday, falling a further 1.3% to close at 5,267.
Banks bore the brunt of the falls. Lloyds was the day's worst performer with a drop of 6.2%, while RBS slid 5.1% and Barclays was 3.2% lower. Standard Chartered lost 2.4% and HSBC fell 2.2%.
In Europe, the Paris CAC 40 slipped three points to 3,008, and the German Xetra Dax lost 37 points to 6,271.
In the US, the Dow Jones Industrial Average lost 0.6% to 12,369, the S&P 500 fell 0.7% to 1,295, and the Nasdaq Composite was 1.2% lower at 2,778.
Overnight in Japan, the Nikkei 225 added 0.3% to 8,633 and the broader Topix index was flat at 725. And in China, the Shanghai Composite and the CSI 300 each rose 0.5% to 2,348 and 2,587 respectively.
Brent spot was trading at $108.56 early today, and in New York, crude oil was at $91.94. Spot gold was trading at $1,594 an ounce, silver was at $28.50 and platinum was at $1,463.
In the forex markets this morning, sterling was trading against the US dollar at 1.5806 and against the euro at 1.2375. The dollar was trading at 0.7829 against the euro and 79.27 against the Japanese yen.
And in the UK, Britain's high streets saw a 12.6% drop in the number of customers in April as rain kept shoppers away. Indoor shopping centres, however, reported a 0.4% rise, according to retail analysts Springboard.
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