Guaranteed Equity Bond Issue 11
Andrew Vaughan - Wed 21 Jun, 2006
...There is no time to waste. Guaranteed Equity Bond Issue 11 closes at 6pm on Tuesday, 27 June – or earlier if the issue is fully subscribed. Its offer is unique, and well worth your consideration...
Last month’s dark days of slumping markets have yet to pass. Great shares at bargain prices now litter the global markets. But it would be wrong to say that it is party time again.
Two black clouds - of rising rates and slowing economic growth - remain on the horizon. Neither is worth obsessing over, however.
Interest rates, like the tide, will always ebb and flow. All that investment markets require for their wellbeing is that the rate policy be both sound and effectively communicated. And more important than GDP growth figures is the performance of individual companies.
All that counts is our ability to predict demand for the products and services of selected companies. But here again at the moment, it is the uncertainty of direction that has sapped confidence and is depressing valuations.
Chairman of the US Federal Reserve, Ben Bernanke has certainly stoked confusion with his off-the-cuff comments about rising inflation, driving Wall Street into another dive and taking the FTSE and most other stock markets down with it. The markets have been aware of inflationary pressures for some time. However, it is the manner in which US and European central banks will respond to inflation that seems to be changing.
Maintaining growth – the aim behind the Fed’s low- interest rate policy following 9/11 and the dotcom crash before it – now seems a lesser priority than curbing inflation. The result is higher interest rates ahead in the US. Meanwhile in Europe, and despite euro interest rates at 2.75% - almost half of the US dollar’s 5% rate
- the IMF has warned against significant tightening.
No wonder markets do not know which way to turn! Suddenly, global rates look set to rise - and the risk is that they will rise higher than they need to.
But the inflationary threat is very real. Up until now, growing exports from China and India have resulted in falling prices for many goods in developed countries. These price falls counter-balanced rising energy and services costs, to keep average inflation figures benign.
But take away the prop of cheap goods from Asia, and inflation figures move up sharply. This is what we saw in this week's UK inflation data. The cost of clothing and footwear sold in British shops actually rose, instead of falling, from a year earlier in May. The average rate rose from 2.0% to 2.2% on the CPI - above the Bank of England's target. That suggests higher UK interest rates ahead.
What's more, retail fuel prices were increased significantly in both India and China this month. And with their export markets now firmly established, cheap goods from Asia are set to get a whole lot more expensive.
How to defend yourself? We reiterate our strong affection for gold, oil and other real assets. Gold may have dropped sharply below $600 per oz, and UK-listed mining shares have suffered a 25% drop since mid-May. But behind the confusion over global rate policies, the risk of inflation is rising, not falling.
Emerging markets are also bearing the brunt of this sudden fall in investor confidence. Turkish and Taiwanese equity markets and currencies have been particularly hit. A shining exception has been Shanghai, where the equity market continued to make new two-year highs until slipping back in the middle of this week.
New records, meanwhile, have been set in Hong Kong. The IPO of Tianjin Port for HK$1bn was subscribed a mind- boggling 1,700 times over. That is an awful lot of cash, physically put on the table by investors. It bodes well for the long list of China IPOs waiting in the wings. Such confidence – on top of the successful flotation of Bank of China – would have been inconceivable during previous bouts of market jitters. Indeed, we have just issued a new "buy" recommendation to members of the Zurich Club, urging them to gain exposure to China's booming credit card market.
Meantime in the London markets, the sudden increase in stock market volatility makes it worth emphasising that share prices are set "at the margin". They reflect the price of the last done trade, not some revised assessment by all shareholders of the value of the company.
Take one of the Zurich Club’s star holding, Domino’s Pizza, for instance. It's showing an "open" return of around 450% since we first recommended it to our members. Today it is capitalised at some £200 million. And last month, a trade of about £100,000’s worth of shares pushed the price down by 8% one dark morning.
Yes, that temporarily reduced the "value" of all the share capital by 8%, or £16 million. But I prefer to look on the situation as this...
£100,000’s worth of shareholders wanted out that day, whereas £199,900,000’s worth of shareholders were happy to stay in. In other words, the last trade can skew a share's action in the stock market so badly, you can lose sight of why you bought it in the first place.
What about the broader market? Now sitting 10% off its 5-year high of early last month, the FTSE100 looks unfairly treated by the global sell-off. As my friend Brian Durrant noted in the Fleet Street Letter last week, the index now trades on a lower price-earnings ratio than it did in March 2003. That was when the market hit its post-DotCom low and began an uninterrupted 3-year bull run.
So looking ahead today, we can only see the FTSE rising to 6,000 and above once the global markets regain their poise. And thanks to the government, there's a failsafe way you can play this recovery. In fact, it will guarantee your investment even if the FTSE falls.
National Savings & Investments products (NS&I) have been around since mid-Victorian times. Traditionally the great British public have bought and sold them by queuing-up at the Post Office. Backed by HM Treasury, they have provided a 100% secure, but rather dull, method of saving for generations of Britons. The 1950s saw the introduction of Premium Bonds, the first National Savings product to marry government-backed security with potential returns that weren't simply low and fixed.
Today the nation holds something approaching £30 billion of Premium Bonds. The prospect of winning one of the two £1 million cash prizes paid out each month – by owning just a £1 ticket – still holds great appeal. Indeed, such is the draw of winning a tax-free prize rather than just earning interest, that HM Treasury gets away with paying out an effective payment rate of just 3% on all the premium bond cash that it issues.
This month, however, National Savings has launched a product that should make you sit up and listen. The security of capital that only HM Treasury can offer is still there. The return, though, offers upside potential linked to the performance of the UK stock market, rather than just to pure luck. And with stock markets currently in roller-coaster mode, the combination of upside potential with complete downside protection has enormous appeal. Buying amid the current dip in the FTSE makes this offer even more attractive.
There is no time to waste. Guaranteed Equity Bond Issue 11 closes at 6pm on Tuesday, 27 June – or earlier if the issue is fully subscribed. Its offer is unique, and well worth your consideration.
Where else will you get a gross return equal to 112% of any growth in the FTSE 100 Index over a fixed term of five years...plus a guarantee, even if the FTSE 100 slumps, of keeping your initial investment 100% secure...and a guarantee, backed by HM Treasury, to repay the original investment and any FTSE-linked return within five working days of the maturity date.
Bond holders will receive not just all the benefits of a rise in the index, but 112% of any rise. With the FTSE 100 dominated by several strong and internationally diversified companies now trading on historically low ratings – most notably BP and Royal Bank of Scotland on PEs of around 10 times earnings – this is an attractive proposition, particularly at a time when the short-term market direction is so difficult to call.
Kind regards,
Andrew Vaughan
for The Daily Reckoning
P.S: Two drawbacks of the bond need spelling out.
Firstly, all returns paid to you on maturity will be chargeable to income tax, rather than to capital gains tax, in the tax year 2011-2012. That may work well for some readers of The Daily Reckoning, but not for others. You will have judge your own situation, as ever.
Secondly, all dividend income is foregone. With the FTSE 100 currently yielding around 3.25% per annum, that is the price which NS&I bondholders will effectively pay for the magnified upside and security of capital they get. But in my view, however, that's a reasonable price to pay for safety and upside potential. Indeed, it may even provide a useful tax-planning instrument.
