How Tesco won

the Marmite war

P10

21 October 2016 Issue 816

Whats a Nobel worth From playboy to

to Bob Dylan?
king of Thailand
P27
P30

Britains best-selling financial magazine

Trumps
threat to
Europe
Even if he loses,
he could destroy
the euro
Page 20

771472 206092

4 2

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>

3.95

HOW TO MAKE IT, HOW TO KEEP IT, HOW TO SPEND IT

MONEYWEEK

21 October 2016 Issue 816 Britains best-selling financial magazine

From the executive editor

In this weeks cover
story (page 20), our
American colleague
Dan Denning looks at
the US election. The
race for the presidency
is now very much
Hillary Clintons to
lose (although if Brexit
has taught us anything its never to take
anything for granted). But her rival
Donald Trump has already pulled the
debate a long way in his direction. And,
says Dan, that legacy could have some
unexpected effects it could trigger the
next, and perhaps final, eurozone crisis.
The popular appeal of Trumps
protectionism, anti-immigration views,
and his rages against the elites, has
influenced Clintons policies (most
notably on free trade), echoing the
success of other populist movements
globally. Its important to understand
this if Trump loses this election, itll
be because of his character, not in spite
of it. He is the only candidate to have
articulated however incoherently
the anger of voters who feel that their
interests and concerns are being ignored
by the current defenders of the status
quo. If Trump wasnt so blatantly
Editor-in-chief: Merryn Somerset Webb
Executive editor: John Stepek
Managing editor: Cris Sholto Heaton
Markets editor: Andrew Van Sickle
Senior writer: Matthew Partridge
Contributors: Chris Carter, Emily Hohler,
Jane Lewis, Sarah Moore, David Prosser,
Alex Rankine
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Cover illustration: Adam Stower. Photos: Rex Features; Alamy.

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(020-7633 3720) Commercial director: Vinod
Gorasia (020-7633 3664) Publisher: Dan Denning
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ISSN: 1472-2062 ABC, Jan Jun 2016: 45,239

repellent, alienating many who would

otherwise be his natural supporters, hed
probably be in the lead right now.
Whats at the heart of this anger? Look
back at history. Weve been here before.
Big economic shocks create a sense
that the system is no longer working
for society as a whole, creating fertile
ground for populism to grow. And the
focal point of todays rage is increasingly
clear. Weve argued for a while that it
was a mistake for democratically elected

Pressure is mounting for

governments to spend more.
This is where the real
danger starts
governments to delegate responsibility
for the economy to unelected central
bankers, and that quantitative easing
(QE) and negative interest-rate policies
were fuelling disquiet. Now politicians
are making that point too.

has done. Its a checklist of themes weve

raised over the years: low rates make the
wealthy wealthier; they keep zombie
firms alive, damaging productivity; they
undermine pensions; the list goes on.
In short, the mood music is changing.
But whats the alternative? Leaving well
alone is one answer but its unlikely to
happen. Instead, pressure is mounting
for governments to spend more. This
is where the real danger starts. As Dan
notes, its a big risk for Europe just try
getting fiscal stimulus through when
Germany is dead against it. But its not
just Europe. If you promise unlimited
access to free money to the typical
government, what will result? Inflation,
most likely. That in turn could trigger
a crash in the hugely overvalued bond
market (see page 6) a topic well discuss
in a lot more detail in the coming weeks.
Meanwhile, we have some thoughts on
how to prepare for the election result
whoever wins on page 22.

Trump has verbally attacked Janet Yellen

at the Federal Reserve. Over here, in The
Daily Telegraph this week, Conservative
peer William Hague wrote up a ten-point
list of the damage central-bank policy

Good week for:

Cats: Ultra-posh nosh for felines went on sale this week, priced at
249.99 for a two-kilo bag. Ingredients in British Banquet from
Green Pantry include Scottish salmon, Norfolk lobster, Devon
crab and Arenkha caviar. A years supply comes to 9,000.

Bad week for:

Viktor Wynd Museum: The museum in Hackney,

east London, is crowdfunding a campaign to buy a
1,000-year-old mummified head. Archaeologists have
criticised the insensitivity and unprofessionalism of the
campaign. For 30, backers get a pinch of mummy dust.
Foodles Production: The Disney-owned production
company behind the latest Star Wars film has been
fined 1.6m for an accident at Pinewood Studios in
2014 in which actor Harrison Ford broke his leg when
he was struck by a metal door on the Millennium Falcon
spaceship.
Go-getters: Average wages for self-employed workers
have fallen from a weekly 300 in 1995 to just 240 a
week in 2015, the Resolution Foundation has found.
Meanwhile, the self-employed workforce has grown by
45% since 2002.
The Randolph: Giles Coren, The Times restaurant
critic, slammed the 21.50 breakfast at the Randolph
Hotel in Oxford as the worst food hed ever had,
prompting a national outcry against overpriced
breakfasts in restaurants and hotels.

John Stepek
email: [email protected]

Loser of the week

Actress Anna Friel

has been ordered
by the local council
to tear down an
extension on her 1m
house in Windsor,
Berkshire. She was
granted planning
permission to build
a single-storey
extension on the
Grade II-listed
Georgian property
in March 2014, but
the Windsor Urban
Development
Control Panel
later reversed
its decision after
complaints that the
work hadnt been
carried out to the
approved plans and
the materials werent
appropriate. The
contractor was given
two months to make
changes, but failed to
do so.

MoneyWeek magazine is an unregulated product. Information in the magazine is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment
decisions. Appropriate independent advice should be obtained before making any such decision. MoneyWeek Ltd and its staff do not accept liability for any loss suffered by readers as a result of any investment decision.

moneyweek.com

21 October 2016

MONEYWEEK

news
Dublin

Sterling lowers Ryanair profits:

Profits hit by weak pound

Irelands Ryanair, Europes

biggest airline by passenger
numbers, has issued its first
profits warning since 2013.
It said the weaker pound is the
main reason it now expects
profits to grow by 5% to
around 1.3bn in the year to
31 March 2017, down from
an original forecast of 12%.

Ryanair reports in euros, and

25% of revenue is in the British
currency, which buys fewer
euros now. Rival easyJet is also
struggling with currencies,
though as it reports in sterling
and makes half its sales in
euros, the problem lies
with the cost of fuel,
which it buys
in dollars.

easyJet now expects a currency

hit of 90m this year, up from
a projected 40m
in July.

Montreal, Canada

Gambling merger called off: Canadas Amaya and

Britains William Hill have called off a proposed 4.6bn

merger after shareholders led by hedge fund Parvus Asset
Management protested. Quite right too, said the FTs
Jonathan Guthrie. The Montreal-based company is the
kind of operator whose offer of a friendly little game
should be easy to refuse. It specialises in the mature
online poker business, has a patchy earnings record and
faces $2bn of debt and an $840m fine. William Hills chairman,
Gareth Davis, is not proving the best judge of horses for courses.
Meanwhile, the global gambling sector continued to consolidate
as Australias two top bookmakers, Tabcorp and Tatts, prepared a
A$9bn deal to fend off foreign rivals.

Lisbon

Portugal awaits debt update: A little-known Canadian credit-ratings agency,

Dominion Bond Rating Service (DBRS), is in the spotlight today. It will announce
whether it still deems Portugals sovereign debt investment grade, or has downgraded
it to junk status. This matters because the European Central Bank (ECB) will only
buy government paper if it is rated investment grade by at least one of four approved
ratings agencies: Fitch Ratings,
Moodys, Standard & Poors, and
DBRS.
The way we live now

The number of freelance workers

offering services in the gig economy
is on the rise, while mothers and lone
parents are also joining the labour
force in increasing numbers.
So outsourcing lifes less palatable
jobs is getting easier and more
popular in the UK, said the FTs
Naomi Rovnick. And were not just
talking about hiring your own chef
for a dinner party. A company called
CycleFox can teach your child to ride
a bicycle, with lessons starting at 40.
And if youd rather not deal with head
lice, London-based Hairforce Lice
Assassins will vacuum them out of
your childs hair and comb out the
remaining nits; they charge 150 for a
full extermination.

MoneyWeek

21 October 2016

Rome

Monti deals blow to Renzi: Mario Monti,

Italys prime minister between 2011 and
2013, has said he will support the No
campaign in Decembers referendum
on constitutional change. The current
office holder, Matteo Renzi, has staked
his future on shrinking the Senate in
order to streamline decision-making and
facilitate structural reforms. If the No
campaign wins, the consequent political
crisis could strengthen the anti-euro
populists of the Five Star movement.
Monti has said the political reforms
may not go far enough and criticised the
governments use of fiscal incentives such
as payroll tax breaks to lubricate public
opinion. Monti is widely deemed a proausterity Brussels stooge, however, so his
ability to swing votes may be limited.

Press Association

iStockphotos

The ECBs bond buying has helped

keep yields implied borrowing costs
low, and a rise would make it even
harder for the government to reduce its
annual overspend. The budget deficit is
supposed to be 1.7% next year,
down from a peak of 11.2% in 2010.
The economic recovery also seems to
be faltering.

Renzi: staking his future on reform

moneyweek.com

news
London

Labour market holding up: Sterling has

recovered a tad from its record tradeweighted low. The bounce was fuelled
by solid labour-market data, with the
unemployment rate holding steady at its
post-crisis low of 4.9%. Surveys of hiring

intentions point to a slowing labour

market; Howard Archer of IHS expects
the unemployment rate to rise to around
6% by 2018. Rising inflation (see page 6)
will counteract tepid income growth and
undermine consumption.

Beijing

Chinese growth picks up: The Chinese

economy grew at an annual pace of

6.7% between July and September, the
same pace as in the first two quarters,
according to notoriously unreliable
official figures. In truth the data are
probably underestimating a recent
bounce, just as they missed a slowdown
last year, said Capital Economics. Its
Chinese GDP measure grew by 5% yearon-year last quarter, up from 4.4% in
the second. Activity is holding up well
but the latest uptick is due largely to
another spurt of credit
growth and a property
market boom, which
officials are keen to
temper given the evergrowing overall debt
pile. Credit is still growing twice
as fast as GDP an unsustainable
trajectory, said Tom Orlik and
Fielding Chen on Bloomberg.com

Hong Kong

The worlds best

IPO of 2016:

iStockphotos

Luen Wong
Group, an obscure
Hong Kong-listed
civil engineering
company, was
in the spotlight
this week after a
6,361% shareprice rise in the
Construction is booming
six months since
its initial public
offering (IPO) a world record for 2016.
There is a boom going on in the Hong
Kong engineering and constructions
sector, but that hardly justifies the surge
in the stock price. The small-cap segment
of the Hong Kong market is notoriously
volatile and illiquid, and the very small
free-float the shares are tightly held
by the firms owners compounds the
problem. Another factor may be an
attempted reverse takeover by a Chinese
mainland firm (in which a company that
might not meet the exchanges criteria for
an IPO merges with an existing one).
Such deals are common in Hong Kong.

Riyadh

Saudi Arabia in record debt sale: Riyadh launched a dollar-

denominated bond this week, marking the first time the

kingdom has issued debt to international investors. It offered
five, ten, and thirty-year paper and managed to raise $17.5bn
an emerging-market record. The benchmark ten-year bond was
priced to yield around 3.4%. The country is feeling the pinch
after a two-year oil-price slump that has wiped over 14% off its
GDP. Last year the budget deficit rose to 15% of GDP and even
cosseted civil servants have had some privileges removed. Saudi
has highlighted its plans for structural reforms and its young
population as key selling points. It also plans to raise money by
selling shares in state-owned oil giant Aramco, with listings in
London and New York likely in addition to the one in Riyadh.
moneyweek.com

Bangkok

King Bhumibol dies: Thailands revered constitutional monarch,

Bhumibol Adulyadej, died late last week at the age of 88 after
70 years on the throne. The government declared a mourning
period of one year, and asked the public to refrain from
celebrations for a month. The crown prince, 64-year-old Maha
Vajiralongkorn, will now succeed his father. This could tilt the
balance in a deep feud which has roiled Thailands politics for
ten years, said Economist.com. The new king reportedly gets on
well with Thaksin Shinawatra, a populist former prime minister,
who alienated the urban elites and the military establishment to
such an extent that his administration, and then his sisters, were
overthrown in a coup. The current junta has been in power for
two years.

21 October 2016

MoneyWeek

markets

The bond
bubble
meets a pin
by Andrew Van Sickle

Simon Ward of Henderson Global

Investors reckons inflation could be
3% by mid-2017. Annual growth in
one measure of the money supply has
jumped to 7.3% from 1.4% in 2011. All
significant upswings in inflation since
World War II were preceded by a pick-up
in money growth, typically by two to
three years. The ten-year gilt is hardly
the only asset anticipating rising prices.
The price of the 50-year index-linked gilt
has climbed by 62% this year. Higher
inflation reduces the real value of fixed
coupons on bonds; the index-linked
version protects investors from this risk.
This is not just a UK story. Benchmark
bond yields in Germany, the US and
Australia are also at four-month highs.
The trend has spread to emerging
markets, with Taiwans ten-year yield

Rex Features

Is the bond rally finally running out of

road? wonders Deutsche Bank. After
a 35-year bull market, signs of a major
turnaround are mounting. The yield on
the UK ten-year gilt has jumped back
above 1.1% as prices have fallen (they
move inversely to yields). The yield hasnt
been this high since the vote for Brexit.
The news that consumer price inflation
(CPI) reached a two-year high of 1%
year-on-year was behind the latest yield
rise. Sterlings sharp fall is stirring up
future price rises by bolstering the cost of
imported goods.
Yellen: central banks wont give up till theyve created inflation
registering its biggest jump in three
years this week. Yields on long bonds,
especially vulnerable to inflation, have
risen sharply. Evidence for a pick-up in
inflation is certainly piling up. US CPI
is back to a two-year high of 1.5%; the
core rate (stripping out volatile food
and energy prices) is close to a four-year
high of 2.3%. Chinese CPI is at 2%, and
producer price inflations first increase
since 2012 suggests that some of the
overcapacity in the Chinese economy has
been mopped up.
It isnt just Bank of England chief Mark
Carney who has indicated he will tolerate
a jump in inflation to ensure growth
continues. Federal Reserve boss Janet

Yellen has made clear she will let the US

economy keep going and would prefer to
be behind the curve on inflation. Central
bankers have, after all, been trying to
inflate our post-crisis debt load away
for years; they wont stop now theyve
created a little inflation.
The Fed, in allowing inflation to run
above target, may be changing the
game, Mizuho Internationals Peter
Chatwell told Bloomberg.com. We
finally have a fundamental reason for
long-term yields to push higher. With
the tone of global markets usually set by
America, the tide in bond markets finally
appears to be turning. The bubble has
met its pin.

South Africas currency, the rand,

it on Bloomberg.com. Gordhan upped
is prone to sharp drops when the
the ante this week by filing papers
countrys finance minister, Pravin
with the high court implicating the
Gordhan, comes under fire from
Gupta family, friends and business
President Jacob Zuma or his cronies,
partners of Zuma, in suspicious
says The Economist. It has tanked
transactions worth $475m.
in the past few days on the news
that Gordhan has been issued with a
Zuma is already under fire after
summons to appear in court early next
violating the constitution by refusing
month. He is to face fraud charges
to repay taxpayers money spent on
for authorising a colleagues pension
upgrading his own home. Deputy
payout. These dubious charges are
President Cyril Ramaphosa has sided
the latest twist in a protracted struggle
with Gordhan. The next few weeks
over control of the Treasury. Gordhan
may show whether the governing
Gordhan: a pragmatist under fire
has tried to keep a lid on spending in
African National Congress can ditch
order to preserve South Africas credit
Zuma and his shambolic, corrupt
rating; it is in danger of being downgraded to junk status.
regime there have been calls for him to go before his term
finishes in 2019 and chart a more business-friendly course
Zuma and his allies, however, appear to want a more pliant
guided by Ramaphosa and other pragmatists. The rand is in for
Treasury, as Mike Cohen and Thembisile Augustine Dzonzi put
an especially volatile few months.

MoneyWeek

21 October 2016

moneyweek.com

Press Association

South Africas power struggle hits rand

markets
Steer clear of
the oil junk

American stocks
will muddle on

Thats partly because it was less significant

than it looked, as Ben Levisohn points out in
Barrons. It largely reflected the slide in energysector profits amid the fall in oil prices. Strip
out energy, and earnings expanded in three
of the past four quarters. Similarly, S&P 500
profits margins slipped by 2% in the past year
and a half, but take energy out of the equation,
and margins have remained stable.

Good news for the US oil

industry, say Ed Crooks
and Eric Platt in the FT.
The oil exporters cartel,
Opec, has agreed to cut
production, and has
therefore stopped trying
to put US shale producers
out of business by flooding
the market to keep prices
low. Oil prices have
risen and sentiment has
improved across the US
energy sector.

iStockphotos

Unless analysts are much more accurate

than usual, the S&P 500s profits recession
should be over, says the FTs John Authers.
Following five quarters of contraction, profits
are expected to have slipped by another 0.8%
in the third quarter of 2016. But as analysts
are usually unduly pessimistic to the tune of
more than 3%, the final figure should turn out
to be marginally positive. It will have been
the shallowest earnings recession on record,
and also the only one not accompanied by a US
recession or an equity bear market.

Nevertheless, its hard to see profit growth

taking off from here; the 10%-plus earnings
growth pencilled in for next year will, as
ever, be revised down as January approaches.
According to Bank of America Merrill Lynch,
only 21 S&P firms issued earnings guidance

The profits recession is nearing its end

in the run-up to this earnings season, the
lowest for any month since 2000, as
Steven Russolillo notes in The Wall Street
Journal. They are waiting to see what happens
in the election, and this is likely to temper
corporate investment over the next few
months. Overall economic growth remains
tepid and the dollar has strengthened; the S&P
500 firms make around half their sales abroad.

High-yield, or junk, bond

sales from oil producing
firms almost came to a
complete halt earlier this
year, and they reached a 12year low. But they are now
tentatively re-emerging.
Oil equities have bounced
and the average yield on
junk energy bonds has
fallen back to around 7%,
the lowest figure since late
2014, from a peak of 21%
in February.

Throw in high valuations, and stocks may

struggle from here. But they are unlikely to
slide. Interest-rates remain close to zero and
companies are showering investors with money
(instead of investing it). The S&P 500s total
yield (the percentage of cash being returned
to shareholders through buybacks and
dividends) is around 4.7%, more than the
4.2% on corporate debt. US equities are set
to muddle on.

But while energy

companies may be in
much better shape, having
trimmed their costs by
about 40% in two years,
their revival in the junkbond market is merely
inflating a massive bubble
further. Yields in the overall
junk-bond market have slid
so far that bond veteran
Martin Fridson reckons the
market is more overvalued
than at any time since
the financial crisis,
says Bloomberg.coms
Sally Bakewell. Steer clear.

A dividend bonanza for investors

Reinvested dividends are crucial to long-term returns, so sterlings plunge is good news.
Forty percent of payouts by UK-listed firms are in dollars or euros, and they are now worth more
in sterling terms. According to the latest quarterly Dividend Monitor from Capita Asset Services,
dividend payouts rose by 1.6% year-on-year to 24.9bn between July and September. A 2.5bn
boost from sterlings slide negated 2.2bn of cuts, mainly from the mining sector. This marks
the largest exchange-rate effect in any quarter since the financial crisis. The total sterling boost
this year is likely to reach 5.6bn, propelling overall payouts to a total of 84.5bn this year.
And exchange-rate gains look set to support UK plc dividends well into 2017. Whats more, if
sterling keeps falling, 2016 will exceed even our newly revised forecast.

Viewpoint

Chart of the week: lobster prices are boiling over

The consumption of financial media can

be dangerous In August 2000, Fortune
magazine [tipped] Ten stocks to last
the decade [the] recommendations
concentrated on technology, media and
telecoms stocks the Fortune portfolio
lost 65% of its value over the subsequent
decade. Three companies went
bankrupt, and one was bailed out. In the
words of the legendary value investor
Benjamin Graham, Investors do not make
mistakes, or bad mistakes, in buying good
stocks at fair prices. They make their
serious mistakes by buying poor stocks,
particularly the ones that are pushed for
various reasons [by Wall Street].

Hipsters have helped propel

lobster prices to an 11-year
high, says Emiko Terazono
on FT.com. Over the past few
years, the crustacean has
become an affordable luxury,
thanks to the surging popularity
of the lobster roll, which used
to be largely confined to New
England. Lobsters have also
begun to appear in discount
supermarkets. The price dip
following the global financial
crisis has bolstered demand
in Asia. Global lobster imports
were 7% up year-on-year in the
first quarter, with imports to
the EU up 20%. Demand has
overwhelmed a gradual supply
increase in recent years.

MoneyWeek contributor Tim Price in his

PFP Wealth Management newsletter

moneyweek.com

Live lobster wholesale prices ($ per pound)

6.5
6.0
5.5
5.0
4.5
4.0
3.5

2005 2006

2007 2008

2009

2010

2011 2012

2013 2014 2015

21 October 2016

2016

MoneyWeek

investment strategy
8

XX

investment strategy

Do your stocks have moats?

Guru watch

by Matthew Partridge

Intangible assets such as popular

brands also act as moats. Apple fans
are notoriously willing to pay up for
the Apple brand, even though similar,
cheaper products from rivals are widely
available. Other types of intangible assets
include respected management or trade
secrets (such as Coca-Colas recipe) that
allow a company to stay ahead of its
rivals. A high cost of switching in terms
of cash, complexity, or time from one
provider to another can also insulate
companies from competitive pressures.
Network effects where a products
market dominance protects its position
work as moats too. The classic case was
the triumph of VHS over Betamax in the

Rex Features

US investor Warren Buffett argues that

an economic moat is one of the main
factors an investor should look for when
choosing long-term investments. A moat
protects a company from competition,
allowing it to hang on to its market
share and maintain its profit margins,
rather than have them eroded away by
rivals. There are several types of moat.
Size is one. Big firms enjoy economies
of scale they can sell goods at lower
prices than smaller rivals, and still
make a profit. They can also use their
market dominance to force suppliers and
customers to accept the terms theyre
offered. Both Unilever and Tesco have
been accused of wielding their market
power in this way.

Rex Features

A dispute between Tesco and Unilever

over the price of Marmite hit the
headlines this week (see page 10).
Unilever demanded that Tesco pay more
for its products including the popular
yeast extract claiming that the weaker
pound has pushed up its costs. Tesco
refused. The two have since reached a
deal, but the outcry over the prospect
of Marmite-free supermarket shelves
shows the importance of a key concept in
investment the economic moat.

Love of the brand is a real if intangible asset

The global
economy is in for
a big squeeze,
according to one
of the worlds
most successful
hedge-fund
managers.
Ray Dalio of
Bridgewater
Associates says were running out
of room to boost growth through
monetary policy for two main reasons.
Firstly, overall debt levels cant go
much higher than they are now.
Secondly, debt cant be made much
cheaper than it already is interest
rates are approaching their maximum
lows and quantitative easing cant
force rates down much further, as
credit spreads are compressing.
Every country faces similar problems.
Japan is closest to its limits, Europe
is a step behind it, the US is a step or
two behind Europe, and China is a few
steps behind the US.

video wars of the 1980s VHS won

out because a wider selection of films
were available for the format. Regulation
is another type of moat. Industries such
as water, electricity and banking are so
tightly regulated that it is hard for new
entrants to challenge existing firms.
Rules meant to cut down on the number
of smokers have made the tobacco
industry virtually immune to new
competition. Patents, trademarks and
copyright are similar barriers to entry.

However, Dalio doesnt expect a crash

imminently. Most economies are
still growing and their growth rates
are neither dangerously rapid nor
dangerously slow. Also, the debts
are largely in the hands of central
bankers who can roll them forward.
However, he does see an intensifying
financing squeeze emerging from a
combination of slow income growth,
low investment returns and an
acceleration in liabilities. These rising
debts are mainly due to large pension
and healthcare liabilities as the babyboom generation retires.

Of course, some moats are more durable

than others. Those based on regulation
can be precarious as they tend to
invite intervention. For example, the
government is keen to make it easier
for people to switch bank accounts and
electricity suppliers. Even those based
on brand loyalty or past performance
eventually disappear, particularly as new
technologies come along. However, in
the short and medium terms a moat can
help to ensure a steady stream of profits,
and if a company lacks an obvious
competitive advantage, its worth asking
yourself why you are investing in it at all.

Dalio suggests avoiding bonds.

If interest rates rise by more than
markets expect, it will have a
negative effect on bonds and all
asset prices. Indeed, says Dalio, it
would only take a one percentage
point rise in US government bond
yields to trigger the worst price
decline in bonds since the 1981 bondmarket crash. That in turn would
hammer share prices, which have
been boosted by low interest rates.
In that case, holding non-financial
storeholds of wealth like gold could
become more attractive.

I wish I knew what EVA was, but Im too embarrassed to ask

Economic Value Added (EVA) is a valuation measure developed
by Joel Stern of Stern Value Management. It is derived from the
idea of economic profit. Economic theory posits that a firm
is only making a true profit if the returns on the capital assets it
employs are greater than the returns you could get from selling
the assets and investing the money elsewhere. In other words, it
shows you if a company is actually generating any added value,
or if your money would be as well sitting in a tracker fund. It is
calculated by taking a companys return on capital, deducting its
cost of capital (usually the long-term performance of shares as
an asset class) and multiplying by the total capital deployed.

MoneyWeek

21 October 2016

EVA helps an investor to work out whether a company is really

a good home for their money. A firm might be growing rapidly,
but if the returns on the capital it puts in to produce that growth
are the same as its cost of capital, then it isnt adding value.
The firm will simply need to invest even more to maintain this
growth, reducing future returns to shareholders, and if returns
on capital are below the cost of capital, then the investment is
actually destroying value. EVA shows why an economic moat
matters if firms are in perfect competition, long-term profits
will equal the cost of capital (in theory at least). As a result, EVA
will be zero, regardless of how fast each firm is growing.

moneyweek.com

city view

XX

city view

Too much money is pouring into tech

The trouble is, it might not work out
as planned for two reasons. The
first is there is an avalanche of cash
that is now chasing very few genuinely
profitable opportunities. That is most
dramatically true of the Saudi/SoftBank
fund. It is very hard to see how cash on
that scale can be spent effectively on
new tech companies, but as more and
more corporate money also comes into
the sector that is only going to make
the problem worse. The fact is, most
new tech businesses dont require vast
amounts of funding. A million or two
goes a heck of a long way.

There has never been a better time to be

raising a few tens of million for some
whizzy new app or sharing technology
in London than right now. Money is
literally swilling around the City, looking
for a home, and a lot of it is coming
from some very big companies. EasyJet
is just the latest to make a move, putting
a multi-million-pound sum into Brent
Hobermans Founders Factory, aiming
to back four or five new businesses, and
create a couple itself, mainly focusing on
the opportunities in the travel industry.
It is not alone. Insurance giant Aviva
has done something similar for the
finance industry, and French cosmetics
firm LOral for the beauty business.
Some of the biggest banks in the world
are investing in fintech disruptors
Goldman Sachs has bought online
retirement specialist Honest Dollar, for
example. The major US investment banks
have made more than 30 investments in
start-ups in the last year. The big daddy
of them all is the $100bn fund being
created in London by Saudi Arabia and
SoftBank a giant of a beast that could
spawn thousands of new businesses. No
doubt we will see many more investments
like that over the next year. Pretty soon,
every big company is going to be pouring
a few tens of million or billion if they
are Saudi into a tech fund. No annual
report will be complete without one.

Getty Images

Matthew Lynn

Just what would they do with it all?

But hold on. What will they do with
all that money? You can see what the
companies are doing. It is perfectly
understandable that companies feel they
need to be a part of digital innovation.
If your industry is about to get blown
up by a bunch of young entrepreneurs
with a whizzy app that does everything
you did, but twice as fast and at half the
price to the customer, then it is probably
best if you have a stake in them even
as they turn you over. It is going to
happen anyway but it will be a heck
of a lot less painful if you are among the
shareholders in the start-up. Newspapers
would be feeling a lot better now if they
had been shareholders in Google or
Facebook, and the hotel chains would
be more relaxed if they had got in on
Airbnbs first funding round.

The second is that picking winners is

hard. EasyJet may want to back the next
big thing in travel, and Aviva the next
monster app in finance, but the reality
is that dozens of new ventures will be
launched, and of those only one or two
will be successful. Most will fall by the
wayside. What are the chances that it
will be the one that Aviva or easyJet
backs that turns out to be the major hit?
Its possible but not all that likely.
In reality, the one thing we know
for certain is that big companies are
remarkably good at wasting money.
Sometimes it is on mergers spending a
lot of money on a takeover that doesnt
work out. Sometimes it is on a doomed
venture into new markets overseas.
Right now it is tech funds. But most of
that money will be wasted as well.
If firms have spare cash sitting around,
they would be better off paying it out
as dividends and then letting their
shareholders invest it in a tech specialist
if they want to, or something else
entirely. It wouldnt be as much fun for
them. But everyone would be better off.

Whos getting what

Nice work if you can get it

Shami Chakrabarti, the shadow attorney general, earns between 2,500 and

Bosko Herman, the former chief

executive of the council in SainteSavine, a small town in eastern France,
is still paid 44,400 a year, despite
losing his job when a new mayor took
over ten years ago. He is one of at least
150 former senior government officials
who are paid by the taxpayer to stay
at home, reports The Times. Under
a 1984 law, senior local government
officials in France who have been
dismissed are allowed to claim 75%
of their salaries for an indeterminate
period while they look for similar work.
Yves Labour, director of the regional
local government management centre,
said Herman had been looking hard,
applying for 49 jobs in 2015, and had
sent off 34 applications this year by the
end of August.

5,000 a time for speeches and appearances at conferences and awards ceremonies,
says The Times. Baroness Chakrabarti, who was made a member of the House of
Lords in August, is represented by agency JLA who class her a C grade booking.

Goldman Sachs has set aside $3.21bn to pay its 34,900 staff bonuses this quarter,
a 36% increase on 2015. Third-quarter profits at the investment bank have jumped by
47%. Goldman Sachss chief executive, Lloyd Blankfein, received $23m in salary and
bonuses last year.
John Stumpf retired as chief executive of scandal-hit American bank Wells Fargo
last week, with $134.1m in stock. Stumpf has also stepped down from the boards
of energy giant Chevron and retailer Target, who last year paid him a combined
$648,258, according to USA Today.
The BBCs retiring director of radio, Helen Boaden, has pension benefits valued at
2.8m, according to The Times. Thats around 840,000 more than they would have
been valued at three years ago, due to falling bond yields, which push up the cost of
providing guaranteed final-salary pensions such as the BBCs pension scheme. Next
April, licence-fee payers will pay 220m into a plan to prop up the BBC scheme.

moneyweek.com

21 October 2016

MONEYWEEK

10

shares
Big movers
9.9%

Drax

Shares in Drax, the owner

of the countrys biggest
coal-fired power station,
jumped almost 10% on
hopes that the EU is about
to approve the UKs state
aid for the conversion
of part of the plant to
generate electricity by
burning wood pellets
biomass instead of
coal. In addition, Credit
Suisse says Drax is the
clearest beneficiary
of the volatility and
scarcity of Britains power
generation.

Man Group

9.4%

There was a triplewhammy of good news

from Man Group, the
worlds largest listed
hedge fund, this week.
It announced a 6% rise
in funds under
management in the
third quarter, up from
$74.6bn to $80.7bn; the
$25m acquisition of US
real-estate manager
Aalto Invest, which has
more than $1.7bn under
investment; and it said it
is to buy back $100m of
shares over the ext year.

Burberry

7.9%

Luxury goods maker

Burberry saw shares
slide this week despite a
robust performance in
the six months to the end
of September including
a 30% jump in underlying
UK sales, as tourists took
advantage of the weaker
pound. Total revenue was
unchanged at 1.1bn, with
like-for-like retail sales
up by 2%. But wholesale
sales slid by 14%, and
the company expects a
similar second half to the
year.

Pearson

7.7%

Shares in educational
publisher Pearson have
taken a beating after the
company reported weaker
sales in a challenging
market. Underlying
sales fell 7%, driven by
lower exam-assessment
revenues in the UK and US,
and declining demand for
higher education textbooks
in the US. It said forecast
profits remain unchanged
due to a tight focus on
discretionary costs, but
that didnt stop investors
selling the stock.

MONEYWEEK

21 October 2016

Love it or sell it?

Marmite maker Unilever picked a fight with supermarket giant Tesco.
Its shares were the loser, says Ben Judge
for standing up to price-war bullies.
Tescos chief executive, Dave Lewis,
spent 27 years working at Unilever
before moving to Tesco; he will
have had a keen sense of when
his former colleagues have
overplayed their hand, says
Nils Pratley in The Guardian.
From a tactical point of
view, Lewis has played a
blinder in positioning Tesco
as a stout defender of UK
consumers interests.

The headlines were full

of Tescos shock removal
of Marmite and other
Unilever products from
its online shopping site last
week. Casting itself against
type, Tesco played the part
of the little guy squeezed
by its suppliers, protesting
against Unilevers price
rise of 10% across the
board. In its defence,
Unilever blamed increased
costs sparked by the
tumbling pound.
The presss verdict was
unanimous: Unilever was the
villain. Sure, currency-related
costs for some raw materials have risen postBrexit, said Jim Armitage in the Evening
Standard, but Unilever is whacking up
everything whether from Burton-on-Trent or
Brussels.
At the centre of this dispute, says Alex
Brummer in the Daily Mail, is massive
hypocrisy, with Unilever adopting a rocket
and feather approach to its pricing policy.
In other words, when the cost of ingredients
rises, prices go up like a rocket. But when
they fall, they fall only like a feather. What
is more, the overall impact of exchange-rate
movements for the third quarter, which covers
the period since the EU referendum, was
to increase costs by 3.4% far less than
Unilever was demanding.
But picking on Tesco was a mistake.
The supermarket giant has a reputation

The City was unanimous

on who had come off better,
says Alex Ralph in The Times.
But the dispute points to an
industry-wide problem that is set to reverse
two years of falling food prices for British
shoppers, say Paul McLean and Scheherazade
Daneshkhu in the Financial Times. Unilever
is not alone in warning of higher prices as the
big four supermarkets are facing a dilemma
about how much of this to pass on to their
customers. What seems beyond doubt,
however, say McLean and Daneshkhu, is that
British shoppers will be hit with at least some
of the costs as supermarkets fight to protect
their often wafer-thin profit margins.
By the time the short-lived dispute was
resolved on Friday, Tesco was the FTSE 100s
highest climber, while Unilever languished
near the bottom, after almost 3bn had been
wiped off its market value. Early this week,
Unilever had recovered somewhat, but was
still down by almost 7% on the previous week.
Tesco shares had fallen by 1%, with the FTSE
100 down by 1.5%.

Brexit sinks floats

Brexit is taking a bite
out of British initial public
offerings, say Elaine He and
Chris Hughes on Bloomberg
Gadfly. Rubbish collector
Biffa and software group
Misys are the latest victims.
This week, Biffa, which
aimed to raise 250m-300m
by floating on the London
Stock Exchange, slashed its
offer price to 180p per share,
from an initial range of 220p
to 270p a share. Misys was
aiming for an IPO that would
value the company at 4.5bn,
making it the UKs biggest
tech company flotation.

Now it is expected to cut

that by 1bn, and has asked
the UK Listing Authority for
permission to float just 20%
of the company rather than
the usual 25%.
Other firms have abandoned
floats altogether. Last week,
Pure Gym ditched its plans
for a 190m listing due to
weak investor enthusiasm,
says Angela Monaghan in
The Guardian. Car-parts
maker TI Fluid Systems
has done the same with its
600m float, citing tough
market conditions.

Listings were already

down on last year, say
Lauren Fedor and Nathalie
Thomas in the Financial
Times. Relative calm in the
market after the referendum
persuaded some bankers
to schedule a number of
listings this autumn.
But growing talk of a hard
Brexit could damp investor
sentiment and delay further
dealmaking. IPOs need not
dry up completely: theres
a price at which almost any
deal can get done, say He
and Hughes. But that price
is coming down.

moneyweek.com

shares
MoneyWeeks comprehensive guide to this weeks share tips
Three to buy
Phillips 66

The Daily Telegraph

This American giant was created four years ago when ConocoPhillips demerged its
refining and marketing business. Specialist refiners like Phillips 66 are less sensitive
than oil producers to changes in the oil price, and industry consolidation has been
good for profit margins. If you buy you will be in good company Warren Buffett
recently increased his stake. $81
Spire Healthcare

The Mail on Sunday

Spire runs the second-largest chain of private health facilities in the UK. Half its
business comes from medical insurance clients and 30% from the NHS. As the
population ages and the NHS funding gap leads to more private operations, Spire
will be able to tap into the over-50s market. It is now investing to meet the demand,
spending 175m on new facilities, including 20 new operating theatres. 379p
Royal Dutch Shell

The Sunday Times

Shell has done well lately, even though the crude-oil price is stuck
around $52 per barrel and the gas price is in a rut. Its still
showering shareholders with dividends, borrowing to keep
doing so while it waits for an oil-price bounce. Buy for the yield,
which is now 6% but be aware that it might not last. 2,084p

A German view
Swiss industrial group Georg Fischer
has a presence in 32 countries and a
finger in several promising pies.
Its core business is metal and plastic
piping systems, which benefits
from the global push to improve
infrastructure and the building boom in
rich countries. It is also profiting from
the trend towards hybrid and electric
vehicles, as it produces lightweight
components such as aluminium
battery cases. Another key division is
precision machinery, which includes
equipment to manipulate implants,
giving it a foothold in the medical
technology market. Total orders
rose by 5% in the first half of 2016.
Wirtschaftswoche thinks the group
could grow its bottom line by 14% this
year, and the shares could prove a
rewarding long-term investment.
They currently yield 2% and trade on a
price/earnings ratio of 16.5.

Vital numbers

Three to sell
Mitie

The Times
Shares in the outsourcing
firm look cheap on less
than ten times earnings,
and it has just won a big
security contract. But they
are still best avoided. The
healthcare side is losing
about 4m a year, a writedown looks on the cards,
and a share buyback may
be suspended. Outsourcers
are suffering from the
uncertain economic
environment. Expect
further bad news.
199p

Cambian Group

Investors Chronicle
The care-homes provider
used debt-funded
acquisitions to grow in
the past, but it failed
to control costs and its
balance sheet is now in
poor health: in June net
debt was equivalent to six
times cash profits. Since
announcing a plan to sell
the adult services division
the share price has risen,
but public spending cuts
will mean a long hard
slog to recovery. Sell.
119p

WANdisco

Shares
Shares in the struggling
big-data firm rose on news
that CEO David Richards
would be leaving, only
for him to be reappointed
days later, sparking a
boardroom revolt. The
company is picking up
new work in Europe and
America, but revenue
has flatlined and it has
been burning cash. With
management seemingly
at odds, investors should
steer clear.
176.5p

11

FTSE 100

Price at
18 Oct

% change
since 11 Oct

7,000

-1.62%

S&P 500

2,140

-1.08%

Nasdaq

5,244

-1.60%

Dax

10,632

-0.28%

Topix

1,357

0.04%

Hang Seng

23,394

-0.66%

$ per

1.23

-0.07%

per

1.12

0.87%

per

127.65

0.29%

Gold ($ per oz)

1,263

0.69%

Oil ($ per barrel)

52

-2.34%

And the rest

Buys
Babcock International

The outsourcer has a solid pipeline of work and a good track record of organic growth (Investors Chronicle) 997.5p

Burberry

News that industry veteran Marco Gobbetti will take over as chief executive has boosted the shares (IC) 1,526p

Centamin

The gold miner has just published record production figures and is highly cash-generative (Shares) 153.5p

Egdon Resources

Egdon should benefit as the government begins to sanction new fracking projects (Shares) 14.75p

Headlam Group

The carpet and floor-covering group has a strong balance sheet and high-yielding shares (IC) 493p

Interserve

The bad news at the support services firm should be behind it and the shares yield more than 7% (Times) 350.5p

Lloyds Banking Group

Lloyds mooted acquisition of the UK business of credit-card giant MBNA would be a good deal (Times) 53p

Marston's

There is nothing in the pub groups trading statement to justify its recent share-price slide (Times) 139.25p

Mondi

Shares in the paper-maker look like good value on 12 times earnings (Times) 1,598p

NWF

The agricultural feedstock supplier should be helped by stabilising milk prices (Shares) 156p

RPC

Shares in the plastic-packaging firm have doubled in the last two years, but have further to go (Shares) 992p

SSP

SSP operates food outlets such as Upper Crust, which take advantage of a captive audience at transport hubs (Shares) 323p

Stobart

Forthcoming results should underline the logistics outfits earnings growth potential (Shares) 168p

Volution Group

The ventilation-products firm should deliver long-term growth a buy for patient investors (Times) 172.5p

moneyweek.com

21 October 2016

MONEYWEEK


12

briefing XX
briefing

Libya versus Goldman Sachs

A clever bank meets an unsophisticated customer with a huge pile of cash. The customer and
the cash part company. Did the bank do anything wrong? Simon Wilson investigates
Whats happened?

derivatives novices. But the idea that a

multi-billion-dollar sovereign-wealth
fund didnt grasp the difference between
owning an equity and doing a derivatives
deal? The court wasnt buying it.

A High Court judge in London has

cleared Goldman Sachs of tricking
Libyas state investment fund into
making vast leveraged investments
in 2007-2008 that it didnt properly
understand investments that were
wiped out in the banking crisis. The
dispute centred on Goldmans dealings
with the Libyan Investment Authority
(LIA), a body set up at Muammar
Gaddafis instigation to invest some
of the countrys oil wealth as it was
reintegrated into the global economy in
the 1990s.

Understandably quite upset then?

Why did they argue that?

The Libyans case was that

the LIAs financial expertise
was so negligible that its

MoneyWeek

21 October 2016

Should Gaddafi have known better?

managers hadnt even grasped they
were not buying shares in Citigroup
(and so on), but were in fact buying
a derivative trade amounting to a
leveraged bet that banking stocks would
rise. Technically, they entered into a
cash-forward purchase agreement
for Citigroup shares with downside
protection in the form of a put option at
the same price as the forward, which
amounts to roughly the same as a cashsettled call option.

A good deal of the interest in the case

has been generated by the details of
some of the alleged hospitality lavished
by Goldman bankers, and in particular
by the key salesman driving the deal,
Youssef Kabbaj. According to
Bloomberg Businessweek, the sweeteners
arranged by Kabbaj ranged from the
salacious (prostitutes in Dubai) to the
bizarre (multiple copies of Michael
Lewiss Liars Poker, the tale of a bond
salesman screwing over his clients).
Kabbaj, a wealthy Moroccan educated
in Paris and at MIT, has since left
Goldman, and strongly denies any
wrongdoing (see box). More prosaically,
and more importantly, the LIA case is
significant because it raises moral as
well as legal questions and because if
Goldman had lost, it would have set an
astonishing precedent.

Leading to more claims?

Indeed. Libyas claim was that one

party to a transaction can have so
much power over the other that the
contract between them is invalid. If the
court had ruled in Libyas favour, it
would have opened banks everywhere
to lawsuits from clients claiming they
were bamboozled. In essence, says Matt
Levine of Bloomberg (himself a former
Goldman securities trader), the case
boils down to the question: if you are a
Clearly, if you are a newcomer to
clever bank, and you come across a fairly
investing you might well not fully
unsophisticated customer with a gigantic
understand exactly what you are getting
pile of money, and you get them to make
into with such an instrument. And the
some big trades (which they may not
court heard plenty of evidence that some
fully understand) and the trades work
of the Libyan managers were indeed
out badly have you done a bad thing?
There is a long tradition, in
the financial industry and the
law, of thinking that its just
fine. Its unseemly, sure but
Born into a wealthy family in Rabat, Morocco, Youssef
not wrong.

Anyone would be furious at losing

$1.2bn, especially when the bankers who
sold you the investment made $200m
in revenues on the deal. The issue at
stake, however, is whether Goldman did
anything wrong, and the court has ruled
very clearly that it did not. This is not
the first instance of mis-selling claims
relating to trades that went badly wrong
during the financial crisis being thrown
out by the courts. In March, a London
court ruled in favour of Santander in a
case brought by three Portuguese firms.
They had bought interest-rate swaps that
snowballed into losses of several times
the underlying debt.
Libya, however, tried an
unusual legal argument usually
only applicable in cases of
nefarious youths tricking
elderly relatives out of their
loot: that Goldman Sachss
bankers had used undue
influence to trick the newbie
Libyans into unconscionable
trades its investment managers
didnt understand.

Rex Features

Goldman was one of the first big banks

to spot the opportunity presented
by Libyas $35bn fund. It got close
to the client, sent key staff to work
alongside the nascent investment fund
in Tripoli, lavished hospitality on the
Libyans and persuaded the LIA (in late
2007) to invest $1.2bn in nine equity
derivatives trades, mostly in supposedly
undervalued banking stocks, such as
Citigroup. The trouble is, when the crash
came and sent bank shares reeling, the
Libyans lost everything.

Why does all this matter?

The salesman behind the deal

Kabbaj attended the elite Lyce Louis-le-Grand in Paris

before studying engineering at MIT. He was hired by
Goldman after a stint at a Moroccan bank, according to
Bloomberg. Goldman initially offered him a job as one of
its quants the maths whizzes behind algorithmic trading
strategies. But he insisted on a role in sales, convinced he
could climb the ladder faster by being close to clients.
The only available post was covering Africa, a backwater
that generated next to no revenue at the time (2006),
so Kabbaj cold-called the nascent Libyan Investment
Authority. Two years later, the Libyan deal had earned him
a $9m bonus, though he ultimately only received $4.5m.

Or is it? Following the

financial crisis, argues
Levine, it is no longer entirely
satisfactory to say that
customers dealing with banks
should look out for themselves,
and that banks have no
responsibility for protecting
customers from themselves.
But, in the UK at least, it is still
the law.
moneyweek.com

best of the financial columnists

Pension funds
must invest
to fix Britain
Juliet Samuel
The Daily Telegraph

The corporate
kidnap of
democracy
Evgeny Morozov
The Guardian

The next
president will
face a crisis
Robert Samuelson
The Washington Post

Hong Kong is
no model
for Britain
Tom Holland
South China Morning Post

MoneyWeek

21 October 2016

As Britains Victorian inheritance crumbles, the government faces

decision after decision on infrastructure, which it meets with delay
after delay, says Juliet Samuel. The problem is that Britain needs to
invest at least 60bn a year more and theres no secret stash of cash.
The solution is to get more private money into the system. Britains
pension funds manage around 2.5trn. With interest rates at rock
bottom, much of that is generating little or no return. Pension
managers wont invest in huge infrastructure projects because theyre
deemed too risky, but they dont have to. Taxpayers can fund the
project and they can buy the finished products, run them efficiently
and collect a steady and reliable yield instead. This already happens
in Canada, Norway, Australia and the US. The system isnt perfect
the state has to shoulder some of the construction risk. But private
companies built Britains factories, ports and railways. Pension funds
should use their cash to fix our creaking infrastructure today.
The industrial-era robber barons eventually gave some of their
business riches to charity, but there was never any mistaking one for
the other, says Evgeny Morozov. By contrast, its hard to see where
todays vast technology companies business ends and charity begins.
Facebooks Mark Zuckerberg, for instance, is investing in companies
that expand educational opportunities in the developing world,
such as BYJU, an Indian firm with an app teaching science and maths.
As Zuckerberg himself admits, it was BYJUs heavy reliance on
personalised learning that attracted him; the sort of learning that
is only possible when masses of user data is recorded and analysed.
It is tempting to sympathise with these corporate kidnappers of our
democracy. They are innovative and their slick, high-tech solutions
may be preferable to quaint, but public, political ones. But not being
able to differentiate between philanthropy and speculation is worrying.
Who will eventually save us from Silicon Valley?
While everyone fixates on the US election, developments in the
world economy threaten to trigger a major financial crisis, says
Robert Samuelson. After the last crisis, the theory was that businesses
and households would focus on repaying debt. This would slow the
economy in the short term, but once debts had receded to manageable
levels, spending would bounce back and the economy would
accelerate. This never happened in most of the world. Instead, global
debt reached a record $152trn in 2015, up from a pre-financial-crisis
$112trn in 2007. Some analysts dismiss concerns about this increase,
saying that low interest rates make high debt levels more sustainable.
Take Japan: its debts equalled 416% of its GDP in 2015, yet these have
not yet caused a financial crisis. Perhaps societies can operate with
debt levels that once were considered imprudent. Or perhaps such debt
will prove, as with the United States housing bubble, a mirage that
bursts destructively. The next president is likely to find out.
The Spectator recently praised Hong Kong as one of the worlds most
aggressively free-market cultures and a model for post-Brexit Britain,
says Tom Holland. Its verdict is badly, embarrassingly, wrong. Hong
Kong is emphatically not a paragon of small-government, free-market
liberalism. Take the citys cab drivers, who, far from being hustling
businessmen, are victims of a system in which the government
arbitrarily restricts the supply of cripplingly expensive taxi licences
and fixes the fares. The story is the same across much of the rest of
an economy captured at every level by cosy cartels supported by the
government. The worst of these distortions is the real-estate sector,
where the government colludes with a handful of big players to
keep land supply tight and the citys property prices artificially high.
Hong Kong is no exemplary free market to be copied: its a squalid,
mutually-lubricating embrace between government and its cronies.

Money talk

Rex Features

14

best of the financial columnists XX

Instead of asking my
husband, Are you going to
pick up the dry cleaning?
Id ask, Are we getting
sued? Is there a warrant
out for your arrest?
Actress Isla Fisher
(pictured) on the
challenges of being
married to Sacha Baron
Cohen during the filming of
his satire Borat, for which
he received death threats,
in The Sunday Telegraph
Theres not a chance
on earth that Id put on a
pair of ripped jeans now.
I spent the early years
aspiring to make money so
I didnt have holes in them
any more.
Musician Jon Bon Jovi,
quoted in The Observer
I dont think a single
trader can tell you what
the appropriate price of
an asset he buys is, if you
take out all this centralbank intervention.
Axel Weber, chairman of
UBS, quoted in the FT
For sale: a jar of Marmite.
Cash only. 30 or $4.
No time wasters.
Actor Stephen Mangan,
on Twitter
When you empty your
positions, looking at the
markets is like sitting
on a mountain in spring
and contemplating the
moon. Only then will your
investments rise like a
dragon above the clouds.
Chinese fund manager
Shen Long, quoted in The
Wall Street Journal
Half of an advertisers
budget is wasted, but no
one knows which half.
Advertising industry
truism, quoted in
The Economist

moneyweek.com

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A273888_DecEgg MoneyWeek_297x210.indd 1

14/09/2016 17:00

politics & economics

16

XX

politics & economics

Hard Brexit or not?

Betting on politics
by Matthew Partridge

by Emily Hohler

In a nutshell, the UK government wants to

gain control over immigration and retain as
much access to the single market as possible,
says Gavin Hewitt on BBC.co.uk. From
the European perspective, these aims are
irreconcilable. And while some European
leaders recognise the mutual benefit of a
smooth exit, others want to punish the UK
to avoid contagion. These are the pressures,
but for now and at the EU summit this week
this is a phoney war. The official line is
that no negotiations can start until Article 50
is triggered, and everyone knows it.
The discussions so far suggest to me that none
of the Brexiters, including Theresa May, have
the foggiest idea what to do, says Matthew
Parris in The Times. The differences
within the Brexit camp are at least as sharp
as between them and some of the former
Remainers. A soft exit doesnt appear to
be on offer. Hard Brexit carries massive
economic uncertainties. Its all very well for

Rex Features

Suggestions from eurosceptic MPs that the

chancellor, Philip Hammond, should shut up
or ship out for his apparent caution on Brexit
are both unedifying and intellectually
alarming, says James Kirkup in The Daily
Telegraph. It is in the interests of the nation
as a whole that ministers examine all
the options. Hammond worries about the
economic effect of leaving the customs union
and the single market, and of restricting
immigration. Other ministers disagree.
As for the prime ministers views, Theresa
Mays party conference speech was seen
as favouring tight immigration controls
over access to the single market, although
according to the FT she has not ruled out
paying the EU for access to the single market
for certain sectors, including financial services.
Hammond: worried about leaving the single market
Theresa May not to want to show her hand,
but after Article 50 is triggered, parliament
can rail against the Brexit plan all it likes; we
will still have to leave within two years.
Not if the EU and our own establishment
have anything to do with it, apparently, says
The Daily Telegraphs Janet Daley. Donald
Tusk, president of the European Council, said
last week that the only real alternative to
a hard Brexit was no Brexit, meaning that
the UK could step back from the brink. Then
there was last weeks splendidly pompous
court action in the High Court claiming the
government cannot trigger Article 50 without
parliaments permission. The fact is, the status
of the referendum was explicitly accepted in
the act of parliament that initiated it. This
action, along with Marmitegate, was a blatant
political ploy in Project Fear Mark II.

Last week SNP leader

Nicola Sturgeon launched
a consultation on a
second vote on Scottish
independence. William Hill
is offering the most longterm market, with offers of
1/3 on another referendum
by the end of 2024 and 9/4
on it not happening by then.
This works out to a 75%
implied chance of it taking
place and a 30.7% chance
that it wont. William Hill
is also offering a market
on the Scots voting for
independence, or not voting
for independence by that
date, both at 10/11 (52.4%).
Ladbrokes has put a vote
either taking place or not
by the end of 2020 at 5/6
(52.4%). It also has Scotland
actually voting to leave
the UK by the same date
at 9/4 (30.7%). Betfair is
offering 2.48 (40.3%) on a
vote by the start of 2019
and 1.37 (72.4%) on no
vote. Id say a vote by 2020
is more likely than not.
But Ladbrokess market
doesnt offer enough value
to justify tying money up
for up to four years. Sit tight
until either the situation
is clearer, or additional
markets emerge.

US-Russian relations in the deep freeze

Relations between the US and Russia are at their lowest ebb
for 30 years, says Ivo Daalder in the FT. Earlier this month
the Obama administration abandoned attempts to cooperate
with Russia on ending the war in Syria, with Secretary of State
John Kerry accusing Russia of terrorising civilians. President
Vladimir Putin promptly suspended a deal with the US to
dispose of weapons-grade plutonium, and nuclear-capable
missiles have since been shipped to Kaliningrad, which borders
on Nato members Poland and Lithuania.
Following alleged Russian cyberattacks against the Democratic
National Committee, the US government has also formally
accused the Kremlin of interfering with their election process,
with the apparent aim of harming Clintons prospects, says
Frida Ghitis on CNN.com. Stopping Clinton is an important
strategic goal for Putin. In contrast to Donald Trump, she
favours a hawkish line towards Russia in response to Putins
increasingly antagonistic foreign policy. Vice-President Joe
Biden has already warned that the US would retaliate for
the Russian hacks at a time of our choosing, and under the

MoneyWeek

21 October 2016

circumstances that will have the greatest impact, says

The Wall Street Journal. If the administration now does nothing,
it will look like it is erasing another red line. Assuming
Donald Trump loses, the possibility of the US confronting
Russia directly is very real, says Simon Tisdall in The Observer.
However, this path is fraught with danger. When cornered,
Putin escalates. He has no domestic opposition and
disdains international law.
Russias greatest vulnerability is its natural-resourcedependent economy, and thats what the West should
concentrate on, says Daalder. A strong sanctions regime will
raise the costs to Moscow of continuing its incursions in
Ukraine, in Syria, and in cyberspace. Containment worked
before. It can work again. The difference is that, rather than an
Iron Curtain, the main faultline is between a Western zone of
transparency and a Moscow-dominated sphere of corruption,
says Brian Whitmore in The Atlantic. Crime syndicates need a
legitimate economy to feed off. Denying Putin & Co this would
go a long way to containing them.

moneyweek.com

funds

17

funds

17

by Sarah Moore
Nutmeg, the online investment manager
(or robo-adviser), last week reported
a pre-tax loss of 9m in 2015, up from
5.3m in the previous year. Although the
company has tripled its turnover since
2014 (from 635,000 to 1.7m in 2015),
it is yet to turn a profit. The firm said
that the rising losses were due to costs
incurred by increasing investment in its
technology infrastructure, as well as its
application to hold clients funds itself,
rather than paying a third party to act as
custodian. As is natural for an earlystage company, we have been investing
heavily to establish ourselves and our
brand, in line with an ambitious business
plan, said Martin Stead, Nutmegs
chief executive, who replaced founder
Nick Hungerford in May.
Customer numbers have grown by more
than 50% over the past year, assets
under management have more than
doubled in the same period, and assets
per client are up by 35%, according to
the financial statements. Nutmeg has
never publicly disclosed how many active
customers it has signed up or its assets

under management, but the Evening

Standard recently reported that the
firm was approaching 500m in assets.
That would leave it a considerable way
from achieving profitability, given its
comparatively low potential margins,
David McCann of Numis Securities told
Citywire Wealth Manager earlier this
year. The scale you need to make the
business work when you have those fee
margins is high. For it to be viable you
need around 5bn in assets, and 10bn
to be economic. Indeed, most UK roboadvisers will go bust before acquiring
the sizeable assets under management to
ensure their sustainability, according
to research by SCM Direct, a wealth
manager. SCM claims that the average
UK robo-adviser spends at least 180
on acquiring each new customer, but
receives revenue of just 147.50 per
customer per year.
Hence, industry analysts sounded less
impressed than Nutmegs management
with its recent progress. Weve long
thought that the robo-advice market
needed a reality check, Michael Barrett
of The Lang Cat, a consultancy, told
Money Marketing. There is an awful

Alamy

Heavy lifting still to do for robots

Robo-advisers must take on more work

lot of hype around robo and fintech, but
despite the promise, the adoption of these
services is painfully slow and, worse still,
appears to be having little if any impact
on the larger existing firms such as
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opinion
18

XX

opinion

Can you trust the trustees?

long-term view, because it could be as
long as 40 years before they need to
draw their pension. They can afford to
be patient, tolerating market setbacks in
the expectation that such setbacks are
always recovered, often swiftly.

Max King
How has your pension fund performed
and what are the assets in it worth?
Few members of collective schemes, even
finance professionals, can answer this
simple question. Most of them just pay
their monthly contribution and assume
that the managers of the fund, watched
over by the trustees and the consultants
who advise them, are clocking up good
returns. But is that a safe assumption?
Members of defined-benefit schemes
shouldnt have to worry. If performance
is poor, the sponsoring company is
obliged to make up the shortfall.
The problem is that these schemes now
have a collective deficit of 300bn, due to
lengthening life expectancy in retirement,
misguided investment strategies and
poor returns. And if your firm fails, the
outlook for members of its pension funds
is grim as past and current employees
of BHS recently found out. But in all
the furore over Philip Greens chicanery,
nobody asked whether poor performance
might also have been responsible for the
pension funds predicament.
Members of defined-contribution
schemes, however, are on their own.
Few people can afford to pay enough into
their pension to ensure a comfortable
retirement without the benefit of
investment returns. To generate those,
most savers will need to take risks, the
most important of which is the risk of
losing money. But they can take a

Unfortunately, that is not how those

they have entrusted their money to see
it. Collective schemes are supervised by
part-time trustees who appoint managers
of the fund on the advice of specialist
consultants. The trustees and consultants
are more worried about their reputations
in the short term than the long-term
interests of the members of the scheme.
Consequently, they favour absolutereturn funds. Its no surprise, then,
that fund-management companies have
been busy manufacturing such funds
to appeal to them rather than to the
customer. These funds generally project
returns of 5% over inflation, which is
roughly the long-term expectation of an
equity portfolio subject to full market
volatility. An intolerance to short-term
setbacks and volatility must reduce
returns and make the projected
return unattainable. Of course,
this projected return is a
target, not a promise, but its
not obvious that everyone
appreciates the difference.
Pension-fund consultants
have lamentable past
form. In the 1980s and
1990s they encouraged
an upward spiral in
their clients allocation
to equities only to see
global equity markets
nearly halve in 2000Not happy with your pension?
The bigger the queue of
complainers the better

2003. Then they championed liability

matching, whereby funds would
invest entirely in bonds to match their
obligation to pay future pensions. How
well that went can be judged by the huge
collective deficit of the defined-benefit
schemes. In 2013 a study by a team at
Oxfords Sad Business School estimated
that US equity funds recommended
by consultants underperformed other
funds by 1.1% per annum between
1999 and 2011. Since this takes no
account of consultants poor
record in asset allocation, this
could be a significant
underestimate.

The lesson is simple.

Check the returns each
year over all timescales and
compare them to a reasonable
expectation derived from market
indices. Complain to the trustees
if youre not happy if enough
members do this, they will have to
respond. Be prepared to switch into a
self-invested personal pension scheme
managed by someone at reasonable
cost who is prepared to take risks to
generate returns and who takes the long
view. Finally, dont be scared of doing it
yourself; at least you will have nobody
else to blame if the performance is poor.

Should Pokmon fiat money get its gold standard?

In-game purchases using virtual currencies, such

as PokCoins, are big business in Japan. Revenues
from mobile games have almost tripled since 2012 to
around $8.6bn, estimates SuperData Research. Much
of that has been driven by virtual currencies, such as
the magic stones of Puzzle & Dragons or the rainbow
orbs of Monster Strike. All could be affected by
the FSA ruling, notes Leo Lewis in the Financial
Times. The FSA hasnt set a date for its decision.
But it is talking to the US firm behind Pokmon

MONEYWEEK

21 October 2016

GO, Niantic, and the industry is watching closely. The issue

is that PokCoins are bought with real money. For example,
players keen to collect more monsters can spend 120 (94p)
in PokCoins on a monster lure, while 500 (3.93) gets you
eight lucky eggs, with which to hatch rarer monsters.
As a result, the FSA is looking at whether to classify virtual
currencies as pre-payment systems. If so, they would fall under
Japans Payment Services Act, and virtual currency
vendors would need to hang on to yen worth at
least half of any unused virtual
currency held by gamers. However,
Japan wont want to dent the growth
of such a lucrative market. Industry
consultant Serkan Toto tells the FT: I
think this will represent a big bureaucratic
nuisance for games developers, but I dont think it
will be designed to break anyones neck.

moneyweek.com

Getty Images

PokCoins, the virtual currency in the Nintendo smartphone

game Pokmon GO, which became this summers top fad,
can be used in the pursuit of catching monsters. But the
virtual coins, which feature a Pikachu Pokmon in place of a
head of state, also have a serious side, says Japans Financial
Services Agency: the financial regulator is considering whether
PokCoins should be backed with real-world yen.

The Week_Classic advert_OL.indd 1

07/10/2016 11:25

20 cover story

Could Trumps legacy be

the end of Europe?
Trumps parting political shot could kill the euro, says Dan Denning

Trump missed
his chance
to place
the blame
for rising
inequality on
the Fed. But
his attack will
survive him
and spread
to other
countries

But his campaign has unleashed powerful forces

against monetary policy as a tool for economic
management. These will gain strength even as
Trump fades from the US scene. The same forces
that gave rise to Trump could, like General George
Pattons Third Army in 1944 and 1945, sweep
across France in the spring and Germany in autumn,
to reshape the political map of Europe and the EU.

Could the polls be wrong?

Before we go any further, I need to point something

out: Trump may still win. Youd be a fool to think
otherwise. We all know what happened the last
time so many were so certain of a specific electoral
outcome Britain voted to leave the EU. So youd
be irresponsible not to think through the potential
investment consequences. A Trump win would
be likely to rock the markets, at least for a few
days. It would be an even more seismic event than
Brexit. Pundits would be shocked. The wailing and
gnashing of teeth would be unprecedented.

likely to rally on expectation of a Clinton victory,

would all correct hard on a shock Tump win.
Sure, a lot would have to go wrong for Clinton
between now and then. The impact of persistent
health worries, server scandals and leaked e-mails
would have to be greater than anyone expects.
And Trump would have to quit self-destructing.
But its all possible, if highly improbable at this
point. The experts in the political, media, and
financial worlds have consistently been wrong when
it comes to reading the public mood in recent years.
So if youre considering all possibilities, one of them
is that Trump could still win. And if he did, all hell
would break loose in financial and currency markets
(see the box on page 26).

The Feds false stockmarket

Lets assume, though, that Trump loses. Why am I

so sure that the focus will immediately turn to the
untenable state of the eurozone? Because before
the campaign became all about Trumps behaviour
towards women, he was gaining ground in the
polls by attacking the performance of one woman
in particular: Federal Reserve chair Janet Yellen.
It worked. There is popular resentment against
quantitative easing (QE), the banks, and low interest
rates, that spans the political spectrum. Thats
why Im confident that the politicisation of central
banking will continue in 2017 and expose the fault
line directly at the heart of the European project.
In the US, Trump accused the Fed chair of being
more political than Clinton. He told CNBC that
Yellen should be ashamed of pumping up a
false stockmarket, and for what she had done to
the country with low interest rates. Had he taken
that line of attack sooner, he might have been
able to build on his populist base and reach out to
Americans who now understand that QE is good for
asset owners, but bad for wage earners and savers.

A recent report from the Danish Economic

Council shows that since rates first went negative
in Denmark in 2012, the OMX Copenhagen 20
has more than doubled. Meanwhile, Denmarks
Yet ever since MoneyWeek first covered the rise
Gini coefficient long viewed as the best measure
of the new populists last year (in issue 759),
of income inequality has gone from being the
the mainstream media and financial elites have
lowest in the developed world to being on a par
consistently underestimated the probability of
with the US. This doesnt necessarily mean that
outcomes they dislike. This is a mistake. And in
Denmarks poor are getting poorer, it just means the
financial terms, it could be a costly one. In June,
rich are getting richer much faster. Trump missed
markets priced in a Remain vote and got a Leave
his chance to place the blame
vote. Massive volatility ensued.
for rising inequality on the Fed.
A shock Trump win on election
But his attack will survive him
day next month would likely
and spread to other countries.
lead to an even more stunning
repricing. It would lead to a
The chance a New York It will lead to the politicisation
the European Central Bank
cascade of sell orders. The
Times poll gives Clinton of
(ECB) in campaigning during the
Dow Jones Industrials, the S&P
French and German elections,
500 and the Nasdaq, which seem
of becoming president

89%

MoneyWeek

21 October 2016

moneyweek.com

Alamy

Its been a long, loud, and vulgar descent into the

politics of the gutter since Donald Trump first
took the stage with nine other candidates for the
Republican nomination in August 2015. Its nearly
over. And, following Trumps crude comments
about women, and accusations of lewd behaviour
from multiple sources it seems safe to say that
Hillary Clinton will be the next American president.
A New York Times presidential poll gave the
Democratic nominee an 89% chance of being
sworn in as the new president on 20 January 2017.
While Trump is still within the margin of error in
some national polls (trailing Clinton by about 4%),
Clinton seems to be pulling away in key swing
states such as Virginia, Colorado, and Arizona.
Shes even gained ground in traditional Republican
strongholds such as Georgia and Utah. Her path to
the 270 Electoral College votes required for victory
seems certain. Trumps path gets narrower by the
day. By the time you read this, the path may have
vanished altogether.

Alamy

Trumps path to victory is getting very narrow but he may have the last laugh
and force the crisis that Europe has needed to have
since 2008. As monetary policy becomes toxic,
were already seeing the focus shift to fiscal policy.
And its a popular one. Voters are tired of austerity.
Governments are done cutting spending. Debt and
deficits have vanished from America as a campaign
issue. The US government ran a $587bn deficit in
the fiscal year that ended in September, 34% higher
than in 2015. Total US federal debt is near $20trn
and now stands at more than 104% of GDP.
That ratio could rise quickly in Clintons first term.
Economists like Paul Krugman have already taken
to the opinion pages of The New York Times to
encourage Clinton to boost public investment in
energy, transportation, and wastewater treatment.
How should we pay for this investment? We
shouldnt not now, or any time soon. Right now
there is an overwhelming case for more government
borrowing, says Krugman. Thats exactly what
youll get in America. But what about Europe?
Fiscal policy is all about government-managed
stimulus. But which governments? Or will just one
government represent all the eurozone states?

A house of cards

The Trump-induced policy pivot to larger fiscal

deficits poses a serious political problem for Europe.
It will force German Chancellor Angela Merkel and
French President Franois Hollande to campaign on
moneyweek.com

behalf of greater political and monetary integration

at a time when popular sentiment against more
Europe is at its peak. Why? Ever since July 2012,
when the ECB president, Mario Draghi, promised to
do whatever it takes to save the euro, the eurozone
has been in a central-bank-induced coma. The debt
trauma it has suffered wont kill it in this state of
non-existence. But it cant recover either. Hard
political decisions on structural reform for European
institutions have been put off. QE has delayed the
day of reckoning. That day may arrive in 2017, now
that QE has been branded politically toxic. The risk
for the ECB and the EU in 2017 is that the end of
QE triggers an existential crisis for the eurozone,
one that can only be resolved in one of two ways:
through further political and monetary integration,
or through the breakup of the project as we know it.
The eurozone got to this point because of the
structural imbalances created by having a common
monetary policy without a common fiscal policy.
The latter would require a European super state. The
public would never have voted for that in the 1990s,
and are even less likely to vote for it now. Imbalances
generated by monetary union without political union
have worsened over the last six years and are now
nearly impossible to correct without reforms that
stand no chance of gaining political approval in an

The risk for

the European
Central Bank
and the EU in
2017 is that
the end of
quantitative
easing triggers
an existential
crisis for the
eurozone

Continued on next page

21 October 2016 MoneyWeek

22 cover story
only the whatever it takes
attitude of Draghi (pictured)
has stopped this debt crisis
from destroying monetary
union. But the ECB could
be sidelined in 2017 for two
reasons. Firstly, QE is no longer
deemed effective. Secondly,
anti-central-bank sentiment is
likely to rise in Europe as it did
in America.

Continued from previous page

environment where nationalism

is in and centralisation is out.
This is Trumps political legacy
to Europe. The only way the
eurozone can survive from here
is by undergoing the kind of
political integration that drove
Britain out of the EU, and that
could fuel nationalist sentiment
in France and Germany in
2017.

Jacques Delors, a founding

The key problem is that
father of the European project,
imposing a single monetary
recently put forward a solution
policy on a group of diverse
in a report from his institute
economies guaranteed a
called Repair and Prepare:
structural imbalance, which
Growth and the euro after
first appeared as a benefit.
Brexit. It called for the
Richer European countries
creation of a eurozone-wide
with current-account surpluses
finance ministry that would
Whatever it takes didnt bank on Trump
exported their savings to those
wield tax and spending powers
on the periphery, which enjoyed investment booms.
on behalf of member states. Yes, member states
Portugal, Greece, Ireland, and Spain gorged on
would lose sovereignty. But theyd gain a eurozone
cheap debt to fuel housing and consumption booms,
with its fiscal house in order, sounder money, and
along with government borrowing and spending
the return of growth to solve the debt problem.
booms. This would have been tolerable if the booms
Each state would guarantee the debts of the others
had created productive assets that made enough
through debt mutualisation. But in reality, this
income to pay the debts off. They did not. When
means a German Europe, with German rules on
the bust came, to save local banks (and French and
spending. That would certainly mean a sounder
German banks), the debts were converted from
euro. But is that a price the rest of Europe is willing
private to public ones. This threatened the solvency
to pay? Well soon find out.
of smaller nations. The ECB organised bailouts and
austerity programmes.
Decembers referendum in Italy is ostensibly about
Italys constitution. But it is also about whether
But the internal imbalances persist. These have left
the EU post-Brexit is headed for more integration,
the peripheral states with high debt-to-GDP ratios,
or for disintegration. The argument for greater
high unemployment, and uncompetitive wage levels.
political and economic integration is coming at a
Once, the peripheral countries would have inflated
time when the people of Europes core countries are
their way out by debasing their currencies. Now
unhappy with the current arrangement. Many in
they cant. In a currency bloc, the lender of last
Europes halls of power will be relieved by Americas
resort here, the ECB is akin to a foreign power
rejection of the Nato-bashing and Putin-admiring
with supra-national sovereignty. Put even more
Trump. But they will quickly find that the distrust
simply, monetary union without fiscal union (one
of central banking and the elite establishment which
taxing and spending authority, instead of many) led
Trump tapped into in the US is potent in Europe too.
to a debt boom. That debt cant be defaulted on or
Trumps parting gift to global geopolitics could be
inflated away. Its too large to grow out of. So far,
the force that finally unravels the euro.
Rex Features

Decembers
referendum
in Italy is
ostensibly
about Italys
constitution.
But it is
also about
whether the
EU post-Brexit
is headed
for more
integration,
or for
disintegration

Berlin has fallen

How to prepare your portfolio for the outcome

Lets start with the big picture. If Trump
wins, markets wont be expecting it,
and we all know that markets dont like
surprises. So the US dollar is likely to
see a knee-jerk fall (though probably not
against the Mexican peso, which stands
to suffer if the US really does cut trade
ties), as will the US stockmarket.
That said, if Clinton wins, the big picture
wont necessarily be all that different.
Both she and Trump are protectionists,
and both plan to boost government
spending in various ways. Neither
of those factors is good news for the
dollar. So while Trump might cause a
more volatile ride for the US currency
particularly if he has a more combative
relationship with the Federal Reserve
than a Clinton administration then the
net impact a year or so out is likely to be

MoneyWeek

21 October 2016

very similar. A weaker dollar is, of course,

generally good news for gold, and if
you throw in concerns over US political
stability (even if Clinton wins, Trump may
not go quietly), then you have a recipe for
a higher gold price.
As for specific industries, a big winner
regardless of who wins should be the
defence sector. Trump wants to boost
defence spending in the US, but also
wants Americas allies to spend more
too and his uncertain commitment to
Nato will only encourage that. Clinton,
meanwhile, as Barrons noted in August,
is more hawkish than President Obama
and her campaign has been heavily
funded by defence industry lobbyists.
Infrastructure should also do well under
either candidate as government spending
picks up. In short, buy guns and butter.

The biggest differences are probably

to be found in the energy and biotech
sectors. Clintons regular sabre-rattling
over drug pricing has taken the wind out
of the biotech sector in the run-up to the
election and any follow through could hit
the whole pharmaceutical sector hard.
Trump could be a relief for these stocks.
As for energy, Trump is expected to make
exploring for fossil fuels easier, while
Clinton favours further tax incentives
for alternative energies, which could be
good for solar stocks in particular. The
overall impact on oil companies is trickier
to gauge. After the oil-price crash, finding
new areas to explore is not a problem
most oil companies are worried about if
anything, a Clinton win could help prop
up oil prices if hostility to fossil fuels puts
pressure on new energy supplies.

moneyweek.com

SCOTTISH MORTGAGE INVESTMENT TRUST

SCOTTISH MORTGAGE WAS ORIGINALLY

LAUNCHED TO PROVIDE LOANS TO
RUBBER GROWERS IN MALAYSIA IN THE
EARLY 20TH CENTURY.

WHILE OTHERS STICK TO

THE INDICES, WE ARE
FREE TO CHOOSE.
Scottish Mortgage Investment Trust has its own way of doing things. So its hardly surprising that the
Trusts portfolio looks nothing like the index. After all, we are active rather than passive investors and we
firmly believe that the index is an illustration of past glories rather than future prospects. In fact, our
abiding principle has always been to invest in tomorrows companies today.
But dont just take our word for it. Over the last five years Scottish Mortgage, managed by Baillie Gifford,
has delivered a total return of 92.2%* compared to 60.5%* for the index. And Scottish Mortgage
is low-cost with an ongoing charges figure of just 0.45%.
Standardised past performance to 30 June each year*:
2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

Scottish Mortgage

-11.0%

26.9%

28.9%

25.8%

4.9%

FTSE All-World Index

-4.0%

21.4%

9.6%

10.2%

14.0%

Past performance is not a guide to future returns.

Please remember that changing stock market conditions and currency exchange
rates will affect the value of your investment in the fund and any income from it.
You may not get back the amount invested.
For a free-thinking investment approach call 0800 917 2112
or visit www.scottishmortgageit.com

Long-term investment partners

*Source: Morningstar, share price, total return as at 30.06.16. Ongoing charges as at 31.03.16. Your call may be recorded for training or monitoring
purposes. Scottish Mortgage Investment Trust PLC is available through the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA,
which are managed by Baillie Gifford Savings Management Limited (BGSM). BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager
and secretary of Scottish Mortgage Investment Trust PLC.

personal nance
personal nance

Coming back to the UK?

Tread carefully around tax

Is it time to switch
current accounts?
Lloyds Bank and TSB will cut the
interest rate on their highest-paying
current accounts from January,
blaming changing market conditions
for the decision (in other words, the
Bank of Englands recent interest-rate
cut from 0.5% to 0.25%). This will affect
millions of savers, many of whom
probably switched to these accounts
because they pay much higher interest
rates than traditional savings accounts.

by David Prosser
Expatriates and others who leave the UK
for an extended period usually become
non-resident for tax purposes and no
longer have to worry about the intricacies
of the British tax system. But anyone
planning a return should think carefully
about their tax position, particularly if
theyre disposing of assets as part of the
move, or have previously done so.

In general, capital gains realised before

you return to the UK are not subject to
UK CGT (although they may be taxed in
the country that you are leaving). This
may now apply even to gains realised in
the same tax year in which you return,
since rules introduced in 2013 mean the
tax year can be split into an overseas part
and a resident part for tax purposes, with
gains in the overseas part not liable to
UK CGT. However, this split-year rule is
not always straightforward in practice,
so advisers tend to recommend realising
capital gains in the tax year before you
return, when possible, to ensure greater
certainty and flexibility.

iStockphotos

Anyone returning to the UK is entitled

to the same capital-gains tax (CGT)
exemptions as other taxpayers on
their return. You can make a certain
amount of investment profit each year
with no liability to CGT (11,100 in
the 2016-2017 tax year) and gains on
certain assets dont count towards this
allowance. These include profits on the
sale of your main home and on cars and
smaller items worth less than 6,000.

Lloyds Club Lloyds account, which

also offers perks such as magazine
subscriptions and cinema tickets, now
pays 4% on balances between 4,000
and 5,000. From January 2017 it will
pay just 2% on balances up to 5,000,
meaning the maximum amount you
can earn in interest per year will be
reduced from 200 to 100. Similarly,
TSB will slash the interest on its Classic
Plus account from 5% on balances
up to 2,000 to 3% on balances up
to 1,500.

Expats could bring back a tax bill as well

In addition, you should be aware of the
five-year rule, which is supposed to
prevent British residents from gaining a
tax advantage by temporarily leaving the
country, selling assets while abroad and
then returning. Under this rule, if the
asset you sell was acquired before you
left the UK and less than five complete
tax years have elapsed between your
departure and your return, you will
usually be liable to CGT on any gain
when you return, regardless of when the
investment was was sold. So if you are
disposing of older investments, check
your records carefully to make sure this
doesnt catch you out.

The ten highest-earning dead

Celebrity

Earnings

Industry

Michael Jackson (pictured)

$825m

Music

Charles Schulz

$48m

Cartoons

Arnold Palmer

$40m

Sport

Elvis Presley

$27m

Music

Prince

$25m

Music

Bob Marley

$21m

Music

Theodor Dr Seuss Geisel

$20m

Books

John Lennon

$12m

Music

Albert Einstein

$11.5m

Science

Bettie Page

$11m

Modelling

MONEYWEEK

21 October 2016

If youre looking to switch accounts to

earn the highest interest rate possible,
the best option will vary depending on
the amount of money you want to hold
in the account. For smaller amounts,
Nationwides FlexDirect account pays
5% on balances up to 2,500 for
12 months and 1% thereafter.
For balances of up to 5,000, the
Club Lloyds account may still be a
good option, as long as you are able
to avoid monthly fees by depositing
1,500 per month. If youre looking to
deposit a significant amount of cash,
Santanders 123 Current Account will
pay 1.5% on balances between 3,000
and 20,000 from 1 November 2016.
You could also look into spreading
balances over different accounts to
avoid the caps on amounts that can
earn interest, or look for accounts that
offer switching bonuses.

celebrities of 2016
A one-off windfall this year from the sale
of Michael Jacksons half-ownership of the
Sony/ATV music publishing catalogue, for
$750m in March, made the singer by far the
highest-earning dead celebrity of 2016,
notes Forbes Zack OMalley Greenburg.
Jackson, who died in 2009 aged 50,
bought the catalogue of music rights,
which included rights to The Beatles back
catalogue, for $47.5m in 1985 ($140m in
todays money) much to the displeasure
of Paul McCartney. The table on the left
lists the ten highest earners of 2016,
according to Forbes. Musicians make
up much of the list, but cartoonist
Charles Schulz, who created
Snoopy, is second, while Dr Seuss,
author of The Cat In The Hat, takes
seventh place.

Getty Images

24

XX

moneyweek.com

Expect the state to keep

you working longer

21

pensions

25

How public-sector workers

can boost their pensions
Hundreds of thousands of publicsector workers entitled to retire at the
age of 60 have a five-year window to
make additional national insurance
contributions (NICs) that will increase
the value of their state pension,
according to Royal London. The
insurance company says more than
500,000 public-sector employees could
benefit from doing this, but awareness
of how to do so remains low.

by David Prosser

iStockphotos

For anyone born after 1961, all

bets are now off when it comes
to state pensions. A governmentbacked review of the current
system has proposed sweeping
changes, including a more rapid
increase in the state-pension age
and an option for retirees to take
reduced benefits early.
Under existing rules, the age at
which both men and women may
begin drawing their state pensions
Many pensioners opt for a more gradual retirement
is set to rise to 66 by October
2020, increasing incrementally to
One option would be to allow people to
68 by 2044. But this process is too slow,
begin drawing their state pension before
given the rate at which life expectancy is
reaching state-pension age if they agreed
rising and the cost of providing pension
to accept a lower payment for the rest
benefits, warns John Cridland, the
of their lives. Cridland also suggests
former Confederation of British Industry
that there is a case for people with the
director-general, who is now leading
longest records of national insurance
a review of state pensions. Cridland
contributions, such as those who started
thinks the current timetable should be
work at the age of 16, to be able to begin
maintained until 2028, when the state
drawing their pensions earlier.
pension age will reach 67, but should
then be accelerated. That could mean
The first of these two proposals would
anyone born after 1961 has to wait
mirror current rules under which people
longer than expected to become eligible
who defer taking their state pension
for their state pension.
beyond retirement age receive a higher
income when they eventually claim.
At the same time, Cridland has also
People who opt for a smaller, earlier
proposed a more flexible system that
pension would have to analyse whether
reflects changing work patterns.
they were likely to receive more in total
Many people now retire gradually, he
over their lifetime. But the flexibility
points out, by cutting down on hours or
could be useful for people in ill-health,
switching to self-employed work as they
or those with other sources of income to
get closer to retirement age, but then
supplement their reduced pension.
continuing to do some work later on.

pensions

This option exists because most

public-sector schemes were, in the
past, contracted out of top-up state
pension schemes, such as Serps, and
people such as civil servants, teachers
and nurses paid fewer NICs than
other workers. In April, these top-up
schemes were replaced with a flat-rate
state pension. Those with fewer NICs
will receive less under this system.
Workers retiring at the age of 60
under the terms of their public-sector
pension schemes wouldnt usually
have any further NICs to make, but
have the option of doing so voluntarily
until they reach the age of 65. These
Class 3 NICs would enable them to
make good some of the shortfalls on
their state pension and, says Royal
London, they are set at such a low level
that they represent excellent value.
A single year of voluntary Class 3
contributions would cost a 60-year-old
around 733, but would qualify them
for an extra 230 of state pension
each year, once they become eligible
to claim. Over the average 20-year
retirement, an outlay of 733 therefore
generates a windfall of 4,600. For
someone making extra contributions
for the whole five years, an outlay
of 4,150 or so nets 23,000 over the
subsequent two decades.

News in brief
l The government has scrapped plans to introduce a
secondary annuities market, putting an end to one of former
chancellor George Osbornes key pension pledges. The plan
would have allowed pensioners to sell unwanted annuities
to insurance companies in exchange for cash lump sums.
However, the government said on Tuesday that it had
concluded that introducing such a market would ultimately not
provide consumers with good value for money.
Annuity products have become less popular in recent years
due to worsening annuity rates, with many retirees opting to
draw a regular income from their pension fund instead. The
governments plans were intended to provide an alternative
option for those who had already purchased annuities, but
it became clear that the market would be fairly limited in its
scope, given the reluctance of insurance companies to take
part. Standard Life and Royal London had already confirmed
that they would not take part in a secondary annuities market,
while LV= had said that it may consider buying back its own
customers policies, but it had no plans to buy from other

moneyweek.com

policyholders. Regulators had also expressed concern that

pensioners would be hit with rip off charges of up to 20%
when they attempted to cash in their pension.
l Online stockbroker Interactive Investor is to buy TD Direct
Investing, a larger rival, in a deal that will make the combined
firm into the second largest execution-only broker in the
UK. The merged company will look after 300,000 customers
and assets under administration of 18bn, passing Barclays
Stockbrokers and leaving it second to industry giant
Hargreaves Lansdown (which has 856,000 clients and assets
under administration of 67.6bn). The purchase is being funded
by American venture capital group JC Flowers, which will
become the majority shareholder in Interactive Investor, and is
expected to go through in the first quarter of 2017. Interactive
Investor was not able to confirm whether key features of
TD Direct investings more sophisticated trading platform
such as multi-currency accounts and the ability to trade directly
on foreign exchanges rather than routing international trades
through intermediaries will be retained by the merged firm.

21 October 2016

MoneyWeek

investing in property
26

XX

investing in property

Should you buy a chalet?

How to buy a share of

your office
It may soon be possible to buy shares
in your own office. International
Property Securities Exchange (IPSX)
will enable owners of individual
commercial properties to float their
buildings on a regulated market,
in much the same way that other
exchanges do at the moment for
equity or debt, says Tom Knowles in
The Daily Telegraph.

by Sarah Moore

Firstly, just to be clear, ski chalets do

not make great investments. Property
consultancy Knight Frank reckons youll
be lucky to make 2.5% a year return
from renting it out and thats assuming
everything goes smoothly. However, if
youre a regular on the slopes and youre
happy to ski in the same location every
year, then once you factor in the savings
on hotels and the priceless joys of aprsski, the prospect might still appeal.
So how do you go about choosing one?
Firstly, consider when youll be visiting.
The skiing season typically runs from
early November to early April, but it is
possible to get late snow in high-altitude
resorts, such as Frances Val Thorens,
Europes highest ski resort. A longer
season will allow you to let out your
chalet for as long as possible and still
enjoy it yourself at less popular times.
Secondly, research your resort carefully.
There is a noticeable correlation, says
Knight Frank, between this years ski
property index (which tracks the price
performance of prime ski chalets) and
resorts investing in their infrastructure.
Also look for plans to expand out-ofseason activities if a resort offers
ample summer entertainment, this
could extend the propertys rentable

Super-prime goes south

The bubble in ultra-high-end London
property seems finally to have burst,
The Guardian reports. Sales of superprime properties worth 10m-plus
have fallen by 86% over the last year.
Just five such houses were sold in
the three months to August, down
from 35 during the same period in
2015. Whats more, the average sale
price has fallen from 22m to 16.3m,
according to property group London
Central Portfolio. Outside the capital,
not a single super-prime property
was sold, compared with ten a year
ago. Rising stamp duty and new
restrictions on foreign buyers have
been blamed for the slide. Developers
are now scaling down projects one
Mayfair development is being revised
to include smaller, cheaper flats.

MoneyWeek

21 October 2016

iStockphotos

If youre a keen skier, the chances are

youve occasionally looked out across
the sunlit, pristine slopes and wondered
what it might be like to own your own
chalet a cosy home from home, located
conveniently for the ski lifts. If youre
contemplating turning this daydream
into reality, how do you go about it?

The closer to the airport, the better for letting

period. (French resort Chamonix is
the most well-serviced year-round
resort.) Factor in travel time, both from
the airport and from the chalet to the
slopes the quicker the better. If youre
based in the UK, the western side of the
Alps is probably the most convenient
destination. However, if you are looking
further afield, less traditional and
hence cheaper ski destinations include
South Korea, Kazakhstan (see page 31)
and Bulgaria.
Finally, be aware of your tax liabilities.
In Switzerland you may need a permit to
buy real estate, before you even get hit
with an annual tax on the property. In
France you may be liable for a wealth tax
if you hold assets above a certain amount
(though you can also reclaim 20% VAT
on the price of some off-plan properties
if you commit to renting it out for 20
years). Specialist companies that can
help with these questions include Alpine
Homes International, Athena Advisers,
Chestertons and Knight Frank.

Those listing their properties on the

exchange will be property owners
whose buildings have a market value
of more than 30m. As with a listed
company, the building will need to
have a board of directors, and all the
associated management in place.
IPSXs exchange is designed to allow
property owners to unlock equity in
what is a fairly illiquid asset, while
retaining control of the building. Both
institutional and retail investors will be
able to buy shares in listed buildings,
and there will be no minimum
investment. IPSX also plans to offer a
second venue allowing the trading of
offshore real-estate investment trusts.
The London-based company
recently won the financial backing
of commercial property investment
specialists Tritax, following on from
an investment by British Land in July
of this year. The exchange will be a
welcome and timely innovation in the
industry, says Mark Shaw, chairman
of Tritax. It sounds like an interesting
idea particularly given the recent
problems experienced by investors
trapped in open-ended commercial
property funds but it remains to be
seen how securitising the buildings
will work in practice. Well be keeping
an eye on trading costs and liquidity
in particular. IPSX is applying for fully
regulated exchange status and hopes
to open for trading early next year.

Guess the price: Cledd y Tan, Monmouthshire

This four-bedroom
house in Kilgwrrwg, a
rural parish a few miles
north west of Chepstow
in Monmouthshire,
dates from 1750. It has
its own stables and
fenced paddocks and is
set high up in a valley
surrounded by open
countryside, with
far-reaching views
towards the Welsh
mountains. The house
has open fireplaces, a
wood-burning stove,
a large kitchen with an
Aga and a conservatory
with spectacular views over the mature garden and rolling countryside beyond. But
how much will this rural retreat cost you? (Answer on page 37.)

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XX

money makers
money makers

The firm behind the

bed-in-a-box revolution

A mattress is a logistical
nightmare, as anyone who has
ever tried to move one knows,
says Jonathan Margolis in the
Financial Times. James Cox,
founder of bed-in-a-box
start-up Simba, has tackled
the problem head on. As the
finished mattress comes off
the assembly line, it goes into
a bag and gets compressed to
a tenth of its thickness under
several tonnes of force. It is
then folded in two, rolled
into what looks like a big
Rizla machine, and packed
into a box. Squeezing a
mattress by 80%-90% of its
original size makes delivery
typically five times cheaper.
The idea of packaging
mattresses like this was
developed in Italy 15 years
ago, but it has taken young,
web-savvy entrepreneurs
such as Cox to make full use
of it. Since Simba launched
in February, it has sold
15,000 mattresses
through its website
and Cox expects sales
to reach 25,000 in the
first year. Turnover is
forecast to hit 100m
by 2019.

27

this year, has shaken up the

selling of razors in America.
The mattress market could be
even more lucrative, reckons
Cox. After all, everybody
needs one.

How Sam Altman plans

to save the world

Like everyone in Silicon

Valley, Altman professes to
want to save the world; unlike
almost everyone there, he
has a plan to do it, says Tad
Friend in The New Yorker.
Sam Altman is the 31-yearold president of Silicon Valley
accelerator Y Combinator
(YC) an organisation that
seeks to teach fledgling tech
start-ups how to become
billion-dollar successes, and
counts Airbnb among its
alumni. Altman has ambitious
plans for YC to back
thousands of new ventures
in areas including biotech,
artificial intelligence robotics
and nuclear fusion.

Online sales of
mundane products
are part of a wider
trend for disrupting
established markets.
Dollar Shave Club,
which was bought
by Unilever for $1bn

In 2005,
aged just
19, Altman
co-founded
Loopt, a
mobile
social media
service, with
funding from
YC. Loopt
was sold for
$43.4m in
2012, netting
Altman $5m.
He joined
YC two years
later, replacing

Giving up their chocolate empire for a life of leisure was never

an option for Angus Thirlwell (pictured) and Peter Harris,
despite pocketing 40m from the 167m listing of Hotel
Chocolat this year. We had the 20m each already, Thirlwell
tells Hannah Prevett in The Times. It was just invested in
shares. The money enables us to do all the things we were
going to do... just faster. Hotel Chocolat began life in 1993 as
mail-order firm Choc Express, before opening its first outlet
in Watford in 2004. If we can make it work there, were on to
something, the pair thought. The chain has since grown into
88 chocolate shops across Britain, two restaurants, a school
of chocolate in Covent Garden and their 70,000-member
Chocolate Tasting Club. But selling the end product wasnt
enough Thirlwell and Harris wanted to take control of the
supply chain. So in 2006 they bought a 250-year-old, 140-acre
cocoa plantation in St Lucia. Five years later they opened a
hotel, restaurant and spa on the Caribbean island. Ive got
the best job in the world, says Thirlwell, so the golf course
isnt very alluring compared with that.

founder Paul Graham as

president.
Even by Silicon Valley
standards, Altman is driven,
says Friend, ploughing
through e-mails and meetings.
His great strength is an
intuitive grasp of complex

systems. His weakness may

be people skills. I have no
patience for things Im not
interested in: parties, most
people. When someone looks
at a photo and says, Oh, hes
feeling this and this and this,
all these subtle emotions, I
look on with alien intrigue.

We have never shared the stage with

a Nobel Prize winner before, Mick
Jagger teased on taking over the stage
from Bob Dylan last Friday in Las Vegas.
Bob is like our own Walt Whitman. Not
that the crowd would have necessarily
known that Dylan had just been awarded
the Nobel Prize for literature. He hadnt
mentioned the accolade once during
his set. The permanent secretary of the
Swedish Academy had given up trying to
contact Dylan to invite him to the awards
ceremony on 10 December. I have called
and sent emails to his closest collaborator
and received very friendly replies. For
now, that is certainly enough.
That might have been expected. The man
from Minnesota, born Robert Zimmerman
in 1941, has been known for his reticence

moneyweek.com

throughout a career that has seen

him sell more than 45 million albums,
showing only limited interest in past
awards. When he won an Oscar for Best
Original Song in 2000, with Things Have
Changed from the film Wonder
Boys,, he skipped the ceremony
and accepted the award by video
link from Australia. Ten years
later he failed to show up at the
White House to receive the
National
Medal for
the Arts.
Still, Dylans
Nobel Prize
will do his
earnings no
harm, says

Madeline Berg on Forbes.com. Hell

get prize money of SEK8m ($0.9m) and
is likely to see a rise in sales, even if
his iconic status means the impact will
be less than for some winners (when
Canadian short-story writer Alice Munro
won in 2013, her sales shot up by over
4,000% in Canada and by more than
700% in the US). That said, he probably
needs the money less than most. There
are no reliable estimates of Dylans
net worth, but it is likely that he
receives several million each
year in royalties. Earlier this
year he sold memorabilia for
a reported $15m to $20m,
while the 45 shows he has
played this year grossed
an average $405,113 each,
according to Pollstar.

21 October 2016

MONEYWEEK

Rex Features

Whats a Nobel Prize worth to Bob Dylan?

28

personal view

Reassuringly boring stocks

A professional investor tells us where hed put his money.
This week: Nitin Bajaj, Fidelity Asian Values
I invest my clients
money in exactly the
same way as I would
invest my own. If I
am looking to buy a
business personally,
I look for a good
company run by a
management team I
can trust, and I want to buy it at the best
possible price. This allows me to avoid
some of the racier stocks you can find in
Asia. What this means is that many of
the stocks I hold seem very boring. But
boring is no bad thing, if it means you get
limited downside with reasonable upside.
One stock I hold in my top ten is Religare
Health Trust (Singapore: RF1U), which
owns hospitals in India run by Fortis
Group, one of three big hospital groups
in the country. In the mid-2000s, Fortis
began diversifying out of India, creating
a business trust and selling ownership
of its assets to Religare. This trust has a
high dividend yield of around 8%, which
is growing in line with the underlying
assets. It also has sticky tenants,
because, as a hospital, it is likely to be
there for the next 20 years (at least).
This makes it a stable, low-risk asset.
As an added bonus, if government bond
yields in India move down and inflation
stays under control, the stock could rerate. Religare Health Trust may not seem
like the most exciting company in the
world, but to my mind it offers a good
risk/reward ratio for the long term.

Finally, perhaps the most boring stock

I hold is also the trusts largest position.
Power Grid Corp (Mumbai: 532898)
is the Indian equivalent of the UKs
National Grid, a utility giant with a
regulated business model. It offers a 17%
return on equity and a dividend yield
of 1.5%. Utilities are not in fashion in
India at the moment as the market is
focused on cyclical businesses as well as
consumer-related stocks. Consequently,
these names are trading on around 40
times earnings, compared with around
11 times for Power Grid. But fashions
change, and when the cycle shifts in
favour of dull utilities once more, this
stock could be a good one to own.

Blue Prism (Aim: PRSM) provides

software-based virtual workforces to
companies, automating many backoffice administrative tasks, replacing
white-collar clerical workers with
robots. The company is new to the
stockmarket, listing on Aim in March
2016, raising 8.8m in capital. Interim
results for the six months to 30 April
showed a 124% rise in revenue, but an
operating loss of 1.4m. Investors are
positive, however the share price has
risen by more than 160% since listing.

Blue Prism Group (Aim: PRSM )

300

Figures in pence

250
200
150
100

2016

Be glad you didnt

Entu (Aim: ENTU) sells energy-efficient
home-improvement products to
consumers, such as energy-efficient
boilers and replacement windows.
The company floated on Aim in
October 2014, but soon ran into
problems, pulling out of the subsidised
solar-panel installation business after
government feed-in tariffs were cut.
It issued a profit warning in September
2015, which dented the share price
another warning this month has done
the same. Shares are down by more
than 60% so far this year.

70

Entu (Aim: ENTU)

Figures in pence

60
50

The stocks Nitin Bajaj likes

12mth high
RF1U
SGD1.06
TISCO THB57.00
532898 INR187.70

12mth low
SGD0.895
THB36.25
INR126.25

Now
SGD1.05
THB51.50
INR176.50

40
30
20
O N

2015

2016

S O

The Telegraph 2016

Another example is Tisco Financial

Group (Bangkok: TISCO), a Thai bank
that holds about 80% of its book in
short-cycle vehicle loans. Tisco is the
leading car finance company in Thailand,
and also has a small investment banking
and securities division. When I bought

it, it was trading at six times earnings,

and offered a 6.5% dividend yield. It is
well managed and well capitalised, but
has been ignored by the market. Part of
the reason for this was that in 2011 the
Thai government introduced a subsidy
programme designed to boost consumer
spending. As a result, an average
production run of 800,000 cars a year
went up to almost 1.2 million. Whenever
something like this happens, it tends to
create non-performing assets later on.
In this case, people bought cars who
shouldnt have, landing Tisco with its
fair share of non-performing loans. This,
combined with the fact that Thailand is
not a very dynamic economy and was
not hitting the headlines, meant the stock
was overlooked by investors.

If only youd invested in

MoneyWeek

21 October 2016

moneyweek.com

Chinas great
growth gamble
China has in recent decades made a big
gamble on growth, says Deepak Lal on
CapX.co. China Development Bank
(CDB), the state-run bank responsible for
infrastructure investments, has become
the worlds biggest development lender
by channelling infrastructure spending
through so-called off-balance-sheet
local-government financial vehicles
(LGFVs). The bank is gambling that the
infrastructure it is investing in will raise
growth and incomes sufficiently to pay
back the debt. Is the bet likely to pay off?
A recent paper by economists from the
Sad Business School in Oxford has some
answers. They examined 74 road and
21 railway projects built from 1984 to
2008 across China and found that more
than half of the projects were destroying
economic value. Only six showed benefits
that greatly exceeded costs. Far from
being an engine of economic growth,
atypical infrastructure investment has
destroyed economic value in China, say
the authors. The CDB has also invested
heavily in development in countries such
as Venezuela. Repayment is looking
increasingly unlikely there too.
Add the liabilities of the CDB-led
infrastructure boom to the official debt
figures, and Chinas true government
debt is some 190%-220% of GDP
second only to Japan. Most of this debt
is domestically held, meaning ordinary
Chinese savers are on the hook for it.
With growth stagnant and a still poor
and rapidly ageing population, the
implicit contract Deng Xiaoping made
with the Chinese of rising incomes
in exchange for their support for the
Communist Party is coming unstuck.

the best blogs

33

the best blogs

29

Sweatshops: a necessary evil?

For all their undoubted shortcomings, are
sweatshops in poor countries actually
a lesser evil than the alternatives? Chris
Blattman and Stefan Dercon conducted
an experiment to find out, reports Michael
Coren on QZ.com. The economists
recruited 1,000 Ethiopians who agreed to
report incomes, health and happiness over
the course of 13 months. They were split
into three groups. One group received $300
and entrepreneurship training. A second
group were offered jobs at several low-wage
factories. A third received nothing.
The studys results show that low-paid
factory work is better than no job at all
though not by much. The group given jobs
Better a sweatshop than no work at all
earned about 11 cents an hour, slightly
more than the control group. The entrepreneurs, however, fared better than both, with
incomes an average of 30% higher. Imperfect as they are, countries are still better off
with sweatshops than without. They encourage mass hiring in the economy, which
lowers the number of workers competing for jobs, which eventually raises wages
generally. But that doesnt mean they need be quite so grim. In the 1990s, an antisweatshop campaign in Indonesia raised wages, forced closure of smaller factories and
lowered profits in the sector, but with no effect on the overall number of jobs.

We must get this simple sum right

By continuing to burn carbon we have
already raised the worlds temperature by
one degree. When world leaders met in
Paris last year they committed to keeping
temperature rises below 1.5 degrees.
But a new study from Oil Change
International, an advocacy group, has
some worrying new numbers, says
Bill McKibben on NewRepublic.com.
The study calculated how much more
new digging and drilling for fossil fuels
we can safely do if we are to keep the
temperature rise below two degrees, the
upper limit widely thought necessary to
prevent the planet cooking. The answer?

Zero. To prevent catastrophic warming,

we mustnt dig any new coal mines, drill
any new fields, build any more pipelines.
To meet the Paris target would mean
closing all the coal mines and some of
the oil and gas fields currently operating
long before theyre exhausted. Fossil fuels
must stay in the ground. The industry
and unions, worried for their livelihoods,
say this is too simplistic. But ultimately
we have a very simple calculation to
make. There is a limit on how much
more carbon we can burn, and we either
burn more or less than that. We must
burn less. If we dont, our 100,000-year
experiment in civilisation will be over.

The economics of recycling

Alamy; iStockphotos

Thanks to behavioural economics, we know humans are at the

mercy of irrational biases when making decisions. It turns out
they affect us when sorting out the recycling from the rubbish
too, says Remi Trudel, a researcher on
the subject, on HBR.org.
People are more likely to recycle
items that havent been distorted
in any way, for example, even
though this makes no difference.
If a tin can is dented or waste
paper torn into pieces, we tend
to put it in the bin rather than in
the recycling. Why? It seems that
when we perceive things as useless, we
are less likely to imagine they can have
a future or be recycled. This is the
distortion bias. Making people
aware of it could significantly
increase the amount of paper

moneyweek.com

and aluminium we currently recycle. We are also more likely

to recycle items that are linked to our identities it feels bad
to trash something you feel connected to in some way. This is
the identity bias. Simple things like finding your name on the
product as in Coca-Colas Share a Coke campaign may
then increase recycling rates. A third factor affects not what we
recycle, but how much we do: people who know they are going
to recycle generate more waste and use more resources than
they otherwise would have. This is known as moral licensing
we know were going to recycle our waste, so we give
ourselves a moral pass to
waste more.
In short, when we recycle,
we are as predictably
irrational as when we
spend and invest. But
bringing these irrationalities
to mind can help us make
better decisions.

21 October 2016

MONEYWEEK


30

profile XX
profile

Crown Prince Maha Vajiralongkorn

Ruthless playboy takes the Thai throne

As a child, the crown prince was

groomed for the throne, attending
school in England and graduating from
Australias Royal Military College at
Duntroon in 1975, after which he was
commissioned into the Thai military as a
qualified pilot. However, the prince has
shown little inclination for public duties
and spends much of his time in Germany,
says The New Straits Times. Last year,
he led two highly publicised mass cycling
events in honour of his parents, in a
sign that he was preparing for the role.
The projects had a grisly aftermath,
notes the FT, when a number of people
involved were accused of using the
monarchys name for personal gain and
at least two of those charged died in
custody in unexplained circumstances.
His own mother once described him as
a little bit of a Don Juan, and although
having multiple lovers is a dynastic

tradition his great-grandfather had

more than 150 wives and consorts the
crown princes former partners have
been treated with spite. He became
involved with an actress, Yuvadhida
Polpraserth, while married to his first
wife (and cousin), and had five children
by her before a spectacular bust-up in
1996, says The New Straits Times. He
then married a former waitress, Srirasmi
Suwadee, with whom he had a fifth
son and heir presumptive, Dipangkorn
Rasmijoti, but she too fell out of favour.
Following their divorce in 2014, he
launched a purge of her relatives, and
her parents, three brothers, a sister and
several others were arrested and jailed
on charges of lse-majest, says the
Asia Sentinel. He is currently going
out with a former flight attendant,
Suthida Vajiralongkorn.
A major part of the ruling militarys
project is to eradicate any lingering
influence of Thaksin Shinawatra, the
populist politician and exiled former
prime minister, says The Economist. The
establishment is worried that the crown
prince, who has a rumoured friendship
with Thaksin, may align himself with
his populist movement and grant
Thaksinites access to the crowns wealth,
locking the old elites out of power. The
crown princes views on how Thailand
should be governed remain almost

Alamy

Thailand faces an uncertain future as

the new King of Thailand, 64-year-old
Crown Prince Maha Vajiralongkorn,
prepares to inherit the throne of his
deeply polarised nation, says Channel
News Asia. His father, the revered King
Bhumibol Adulyadej, who died last week,
ruled for 70 years with rectitude and
devotion. The crown prince, meanwhile,
is best known for his womanising, love of
fast jets, and occasional cruelty.

entirely opaque, says Oliver Holmes

in The Guardian. However, Andrew
MacGregor Marshall, a British journalist
who has written extensively on the
monarchy, warns that his ruthlessness
could be far more destabilising than the
dissolute, distracted ruler anticipated by
many of the elite. With an incompetent
junta in power, providing impunity to a
loathed prince who is increasingly out of
control, the likelihood of some kind of
uprising seems very high.

The worlds greatest investors

This week: Walter Schloss
How did he start out?

Schloss was born in New York in 1916,

left school at the age of 18, and took a
job as a runner, delivering messages on
the floor of the stock exchange. While
working there he took some night classes
on investment given by legendary value
investor Benjamin Graham, given on the
floor of the exchange. As a result, he got a
job with the Graham-Newman Investment
Partnership. In 1955 he struck out on his own, managing money
for a group of private investors under the umbrella of the
WJS Partnership. He closed the partnership in 2000, stopped
managing other peoples money in 2003 and died in 2012.

What was his strategy?

Like Graham, Schloss was a classic value investor. He focused

on companies that were selling below what he considered to
be the value of their net assets, provided they had little debt.
Unlike other value investors, he was relatively unconcerned
about the prospects of the underlying business and was
unafraid of diversification, sometimes holding as many as 100
different stocks. He avoided companies that were run by people
he considered dishonest or greedy, even if they were smart.

MoneyWeek

21 October 2016

Did this work?

In 1983 Warren Buffett wrote an article for Columbia Business

School Magazine, in which he praised Schloss as one who
had used Grahams principles to deliver exceptional returns,
thereby disproving the idea it was impossible to beat the
market. A follow up article put WJSs returns at an average
of 16% to investors, nearly 8% above the performance of the
S&P between 1955 and early 1984. Schloss would continue to
outperform and between 1955 and 2000 his fund would return
15% to investors, compared with 10% for the market as a whole.

What was his best investment?

Schloss made a huge number of investments. Successes

include buying Lehman Brothers shortly after its initial public
offering in 1994 and selling it later that year for a 75% gain.
Perhaps his best individual trade was the decision to get out
of the market in 2000, right before the dotcom bust, and to
short some of the most overvalued technology shares, such as
Yahoo. The value of his investments rose in 2000 and 2001.

So should we follow what he says?

Schlosss success suggests a good strategy can beat the market

over a long period without requiring in-depth research into
each firm. That said, high stock valuations, and large numbers
of rival bargain-hunters, have since made it far harder to beat
the market by buying unloved stocks, he told Forbes in 2008.

moneyweek.com

spending it

31

A five-page section covering holidays, cars and housing

France

Skiing off the beaten track

Compared with the Alps, the Pyrenees

have always seemed a bit of a provincial
mountain range for skiers, says Stephen
Wood in The Sunday Telegraph. Thats
not for a lack of slopes there are more
than 40 on the French side alone. Rather,
its the relative lack of glamour the rich
and famous tend to gather in Courchevel
and Val dIsre in the Alps. No oligarchs
own over-the-top chalets in the Pyrenees
and more fool them. Cauterets, on the
French side of the peaks, is less a ski
resort than a centuries-old spa town of
considerable beauty.
The old wooden railway station, which
wouldnt look out of place in a spaghetti
western, is best viewed from the gondola
on the way up to the Cirque du Lys,
with its 20 pistes on undulating terrain
that mostly suits skiers of intermediate
ability. For beginners, theres a learning
complex with three different zones and a
covered magic carpet travelator to get
them back up the hill. Stay at the family
run Le Lion dOr hotel (Hotel-Cauterets.
fr/en), a place of nooks and crannies
and home-made baked goods. For the
indolent or unskilled, Cauterets would be
an ideal destination for a short break.

Kyrgyzstan

Obergurgl in Austria: the Diamond of the Alps is a paradise for skiers

powder-loving, backcountry skiers and
snowboarders.
If you think the food sounds bad, the
resort infrastructure is even worse.
The few, scattered lifts are little more
than relics from the Soviet era. But,
ever innovative, Suusamyr Lodge uses
modified piste-bashers to ferry skiers up
the slope a system dubbed the poor
mans heli-skiing, but it works. As long
as youre careful, the snow in Suusamyr
is simply too good not to enjoy.

Austria
Rough and ready, but perfect for powder-lovers
You can forget the vin chaud, tartiflette,
and that quintessentially Alpine herbal
liqueur, gnpi. Aprs-ski in Kyrgyzstan
consists of kymyz a bitter, alcoholic
concoction made of horses milk and
besbarmaq horse sausage served with
noodles, says Tristan Kennedy in The
Guardian. But if the restaurants around
the Suusamyr Freeride Lodge (email:
[email protected], +996 550 198 899) lack the
sophistication of those in Alpe dHuez,
the area makes up for it with the quality
of the skiing. Here the snow is always
light and fluffy, thanks to the extreme
Central Asian climate. It is perfect for
moneyweek.com

When friends suggested we go to

Obergurgl in the Austrian Alps, we
thought they were having a laugh, says
Lesley Grant in the Daily Express. That
was until we discovered it is considered

a paradise for skiers. Discerning skiers

would have known that all along. After
all, its not for nothing its known as the
Diamond of the Alps it is stylish,
has queue-free lifts, top-quality hotels...
and an absolute snow guarantee on
70 miles of immaculate slopes. Hiring
ski gear is a breeze and if you jump on
the cable car to Hochgurgl, you will
find long, wide runs and the best of the
sunshine.
Aside from the skiing, there are eight
miles of cleared winter hiking trails, and
many excellent restaurants for when
the going gets tough, without the need
to queue up. Hotel Madeleine (HotelMadeleine.com), a family run hotel and
spa, is just 200 yards from the lifts, and
oozes charm and friendliness.

Skiing with the legends

This, I think, is the best ski trip ever, says Chlo Hamilton in The Independent.
Legend Holidays & Events (OurLegend.com) is a company founded by retired rugby
stars Austin Healey and Will Greenwood, and which gets sports professionals to
host luxurious trips, sharing their pearls of wisdom with guests along the way.
Hamilton followed in the tracks of British Olympic downhill skier Chemmy Alcott.
As well as choice skiing advice, you get all the trimmings: theres the obligatory
raclette and wine, dinner at La Folie Douce in the nearby resort of Val dIsre in
France, and a heli-ski escapade on the final day. But the real focus of the holiday is on
the pros, says Hamilton. Chemmys passion for powder is infectious and learning at
the skis of legends is, well, legendary.

21 October 2016

MoneyWeek

32

property

This week: properties for 800,000 from a former mill house in Dunbar, East Lothian, to a top-floor apartm
Bristol Gardens, Brighton, East Sussex. A double-fronted 1820s house with access
to the private gated gardens of Sussex Square, which include six acres of landscaped
gardens overlooking the sea, with a tunnel leading directly to the beach. The house has
period fireplaces, wood floors, a winding staircase and a roof terrace. 4 beds, 2 baths,
2 receps, kitchen, courtyard. 800,000 Mishon Mackay 01273-670067.

Tanat House, Llanyblodwel, near Oswestry, Shropshire. A Grade II-listed village

house with a Georgian faade. It has wood floors, open fireplaces and a cobbled
courtyard with the original stables. 4 beds, 2 baths, 2 attic beds, 3 receps, breakfast
kitchen, conservatory, cellar, landscaped gardens. 799,999 Savills 01952-239500.

Marine Lodge, Deal, Kent.

A renovated house opposite Deal Castle
with views of the White Cliffs of Dover.
It has period fireplaces, wood floors,
a large kitchen with a Rangemaster
oven and French doors leading onto the
garden. 3 beds, 3 baths, 3 receps, roof
terrace, garden. 845,000 Bright &
Bright 01304-374071.

MoneyWeek

21 October 2016

moneyweek.com

property

33

or apartment in a mansion block close to Londons Bishops Park

The Sanctuary,
Broadmoor
Common, Woolhope,
Herefordshire. This
1680s property is set on
the slopes of a valley just
off Broadmoor Common
Nature Reserve. It has
exposed wall and ceiling
beams, period fireplaces
with wood-burning
stoves and a kitchen
with oak cabinets and a
range oven. 6 beds,
2 baths, 2 receps, cellar,
2 outbuildings, stables,
garden, 2 paddocks,
woodland, stream, 2.3
acres. 820,000 Grant
& Co 01531-637341.

Bishops Mansions,
Fulham, London SW6.
A top-floor apartment in
a mansion block close to
Bishops Park. The flat has
French doors leading onto
a south-facing balcony and
access to communal gardens.
2 beds, bath, recep, share of
freehold. 795,000 Knight
Frank 020-7751 2400.

Tyninghame Mill,
Tyninghame, Dunbar,
East Lothian. A restored
former mill house with a
two-bed cottage, studio and
outbuildings. It retains its
original mill wheel and has
an open fireplace with a
wood-burning stove. 3 beds,
2 baths, recep, kitchen,
0.6 acres. 795,000
Savills 0131-247 3700.

Coton Cottage Farm, Malvern,

Worcestershire. An 1850s farmhouse
with views of the Malvern Hills. It has
quarry-tiled floors, exposed timbers and
beams, open fireplaces and a range of
traditional outbuildings and barns set
around a courtyard. 4 beds, 2 baths,
dressing room, 3 receps, breakfast
kitchen, gardens, fields, 12.6 acres.
775,000 Knight Frank 01905-723438.
moneyweek.com

South Wing, Stoneleigh

Abbey, Kenilworth,
Warwickshire. The South
Wing is part of Stoneleigh
Abbey, which is set in 690
acres of parkland with views
over the River Avon. It has
polished wood floors, period
fireplaces, a newly fitted
kitchen, a private garden and
shared access to communal
parkland. 4 beds, 3 baths,
2 receps. 800,000+ Fine &
Country 01926-455950.
21 October 2016

MoneyWeek

cars
34

XX

cars

The best of the big barges

Here we have yet another fast Audi, says John Howell in
Autocar. So what is it that makes this new S8 Plus so special?
That question is best answered with a quick test. Put yourself in
the big, quilted leather seats of this limousine, and unwind with
the massage feature built in. Bask in the glory of one of the most
solidly built interiors money can buy. Start the engine and plant
your foot. Just over three seconds later, youll be doing 62mph.
That makes this the fastest-accelerating limousine you can buy.
And even at mammoth speeds, it just keeps pulling it would
probably crack 200mph if the top speed werent electronically
limited. Yet even at very startling speeds, the road and wind
noise never startle. Of course, a luxury car that can whisk
you along at such speeds is ultimately pointless, bonkers and
unnecessary. But do I want one? Well, I do, very much as it
happens. The S8 Plus made me smile. A lot.
This Plus model is 16,320 more than a standard S8. Thats
a pretty hefty premium on an already pricey car, says
AutoExpress. It is an exemplary cruiser: it will waft you with
ease down Germanys arrow-straight, derestricted autobahns
at frightful speeds with composure and poise. But on Britains
potholed roads, the flaws become apparent. The brutish muscle
car charm disappears on twisting country roads and the car
generally lacks sporting feel.

barely awake at 40, it is supremely

quiet and dreamily smooth at those
speeds. Honestly, Ive been in
noisier and less comfortable beds.
You may imagine that a car this
squidgy is incapable of being exciting
and youd be right. But it transcends
its flaws. Ive always said the BMW 7 Series
is the best of the big barges, says Clarkson.
Or maybe youre already perfectly happy
with your Mercedes AMG S 63. But
dont be. The A8 is a nicer place to be
when youre doing 40. Which you
will be.
Price: 98,395; Engine: 3,993cc, twinturbocharged, petrol. Power: 597bhp
at 6,100-6,800rpm. Torque: 553lb ft at
2,500-5,500rpm. 0-62mph: 3.8 seconds.
Top speed: 189mph (limited). Economy:
28.2mpg. Carbon dioxide: 231g/km.

Perhaps, but in Britain these days most

of us spend most of our time doing
40mph on motorways, says
Jeremy Clarkson in The
Sunday Times. And
because the car is

Wine of the week: a debonair charmer

2011 Haskell Vineyards, Aeon,
Stellenbosch, South Africa (24.95,
reduced to 22.75 each if you buy a
case, Lea & Sandeman, 020-7244 0522,
LeaAndSandeman.co.uk).

by Matthew Jukes

I have no doubt that the recent Lea &

Sandeman tasting held at the home of
wine, Vintners Hall in London, was and
will be the finest indie wine merchant
event of the year. Wine after wine shone
with individuality, excellence and value.

I urge you to seek them out because their portfolio is

exquisitely assembled and I have no doubt that loads of their
finds will pop up on this page in due course. Haskell Vineyards
and Dombeya, the original name for the estate, are labels I have
stalked for a good few years. The 2013 Dombeya Chardonnay

MONEYWEEK

21 October 2016

(13.50) is a breakthrough wine for them, with a

satisfyingly mellow mid-palate balanced by a tart, zesty
finish. Take a break from white Burgundy and give this
seductive wine a whirl.
The star of the show (and of the whole tasting) was
Aeon, a syrah with a dribble of mourvdre embedded
in its core. This is a measured wine with equal parts
brutish warrior and debonair charmer. Deep and dark,
bristling with power throughout, this wine is encased
in the most genial and suave exterior which hints at
menace but never frightens the palate. When you dive
in you are treated to a sensory explosion which will
leave you blushing with excitement.

Matthew Jukes is a winner of the International

Wine & Spirit Competitions Communicator of the

Year (MatthewJukes.com).

moneyweek.com

blowing it

Bodyguard to the stars

Mark Billingham spent 27
years in the SAS. In 2005
he led the mission that
rescued British hostage
Norman Kember in Iraq
and, later that year, the
SAS counter-terrorist
team during the London
bombings and their
aftermath. Now he has
forged a successful second
career as a Hollywood
bodyguard protecting
celebrities such as Angelina
Jolie and Brad Pitt.

35

pointing out errors. But

one point, as The Times
says, definitely needs
correcting: during the
programme, Sir Robert
Peel told Her Majesty he
did not shoot. In fact,
he was among the finest
shots to inhabit Downing
Street. At one weekend
in Suffolk, he was bet 300
guineas he couldnt bag a
pheasant, two partridges,
a brace of snipe, a
woodcock, a rabbit and
a hare in the same day.
Peel went out at 10am
and returned at lunchtime
having bagged the lot.

Channel4

Talking about the robbery

of Kim Kardashian in
Paris, Billingham tells The
Times there is a nine in
Margaret Thatchers
ten chance that someone
within her circle let out
love of toffs
that she would be in
As Dominic Lawson
her apartment with the
Billingham (right): That [action] role youve just done, mate? I do that for a living notes in The Sunday
diamonds at the time of the
Times, an interesting
not to be big-headed, but that [action]
robbery. People always talk too much.
theme of Ken Clarkes memoirs is that
role youve just done, mate? I do that
Celebrities, for example, need to be
while Margaret Thatcher always scorned
for a living. He gets on especially well
wary of their drivers. Never trust them.
effete public schoolboys, she retained a
with Brad Pitt and Angelina Jolie. Pitt,
Theyll always let you down and know
veneration for the aristocracy.
he says, would pop into the hotel room
where youre going and tip people off.
and ask to borrow my T-shirt or vest
So no talk in the vehicles and never give
The two had a furious row, for example,
Sometimes hed ask me what it was like
away times and locations.
when Thatcher wanted to give the
to just go to the pub, and Id think he was site of the closed St Georges Hospital
taking the p**s. But then I realise they
Billinghams first piece of bodyguard
on Hyde Park Corner back to the
cant do that. Even if they wanted to.
work was for Tom Cruise in Rome. The
immensely wealthy Grosvenors who had
Theyre normal people doing a job, but
actor needed protection and Billingham
originally donated it the then Duke of
you feel sorry for them because they cant
flew out. He refused to play the crony,
Westminster wanted to turn it into a fivehave what we have.
says Ben Machell in The Times, laid
star hotel. I was perfectly happy to sell
down the ground rules and Cruise
it, writes Clarke. But I wasnt prepared
impressed did as he was told.
to give it to them for nothing. In the
How crackshot Robert Peel
Billingham has continued in the same
end he got his way, but an indignant
won 300 guineas
vein, resolutely unimpressed by fame.
Thatcher took a lot of persuading.
Daisy Goodwins entertaining ITV series
The celebrity thing has never bothered
about Queen Victoria has attracted
me. Its just a bloke whos been in a film.
the usual scoffing from those who love
I dont get overwhelmed by that s**t. And

Tabloid money Tescos lesson for the Brexit doom-mongers

n Shame on food giant Unilever for trying to capitalise on
the fear around Brexit by jacking up prices of family favourites
like Marmite and PG Tips, says Carole Malone in the Sunday
Mirror. Tesco, told theyd have to pay 10% more (because of
the falling pound) had the cajones to say: Stick your Marmite
and tea bags where the sun dont shine.
And guess what? Unilever folded. Its a lesson to those doommongers who say Britain is going to get stuffed on everything
post-Brexit. Were not if we hold our nerve. Anyway, Marmites
ingredients all come from the UK, so if Unilever gets uppity
again were more than capable of knocking up our own.

n When I was living next door to the Blair family in Islington,

my son was packed off to the local comprehensive, Islington
Green, while Tony and Cherie shipped their sons all the way
across town to the London Oratory, the most exclusive faith
school in the land, says Tony Parsons in The Sun. So it comes
as no shock that Baroness Chakrabarti chooses to send her

moneyweek.com

own little darling to 18,000-a-year Dulwich College. Labour

politicians always passionately believe in comprehensive
education. But for your children. Never their own.

n Scary Nicola Sturgeon, who spits out words like a staple

gun on automatic fire, wants to re-run her doomed referendum

on Scottish independence, says Trevor Kavanagh in The Sun.
It will not happen. On its own, deep in debt and with North
Sea oil at half price, the Scottish economy would be a basket
case worse than Greece, as ITV interviewer Peter Smith
pointed out. Sturgeon took offence, claiming it was an insult to
compare Scotland with Greece. Well, Im Scottish, retorted
the reporter, and Im not insulted.

n In a book about Donald Trump, Ronald Kessler says Trump

gave him a tour of his Florida estate, reports the Daily Mail.
Opening a door, Trump said: This is a secret passageway that
goes all over the house. So if I want to visit someone in another
room, I can do it without the security people watching me.

21 October 2016

MoneyWeek

collectables
36

XX

collectables

What art tells us about stocks

Where have all the Brits gone? Thats what
galleries were asking at the Frieze Art Fair in
London, held at the beginning of the month.
French, German and American visitors
were all overheard, says James Tarmy on
Bloomberg Pursuits, but British accents were
far and few between.
Theres no great mystery as to why that was,
of course. The plunging pound has made
it comparatively more expensive for homebased buyers in a global
market where many
artworks are priced
in dollars. Still, while
overseas collectors
continued buying,
the first day of the
fair was busy but
lacking in the kind
of heady frenzy of
years past, says
Tarmy. Its not
just the Brits;
the wider
market
has also
quietened.

stress tests in the worlds major art hubs,

says Kelly Crow in The Wall Street Journal.
The Frieze Art Fair was one, while Sothebys
in Hong Kong held a series of high-profile
auctions a fortnight ago. That brought in
$282m above the low estimate of $260m,
but a far cry from the more than $400m
of five years ago. Next up is New York where
Sothebys is hoping to raise $9m from the
sale of David Hockneys six-panel Woldgate
Woods, 24, 25 and 26 October, 2006, on
17 November seen as a fresh test
of the painters appeal, says Crow.
One crucial factor in the slowdown
is China. In recent years, ever
more money has been flowing
into the art market from Chinese
buyers but they have become less
willing to spend as a result of the
countrys economic slowdown.
Hence hopes of a quick pick-up
in the art market rest largely on
stronger growth there or at
least improving sentiment.

On that front, optimists

will note that there are
clearly still some Chinese
collectors with deep
Globally,
Theyre looking but are they buying?
pockets. Sothebys
art sales
biggest transaction of this year was the
peaked in 2014 when they totalled $68.2bn
sale of Jenny Savilles painting Shift to the
after years of breakneck growth. A year later,
founders of Shanghais Long Museum for
sales fell by 7% and the decline has picked up
$9m triple the pre-sale estimate. Nor has
pace this year. Thats left not only collectors
it gone unnoticed that Chinese billionaire
worried, but also equity investors, who see
businessman Chen Dongsheng became the
the art market as a bellwether for the global
largest shareholder in the same auction house
economy, says Michelle Celarier in Fortune
last summer, with a 13.5% stake.
magazine. Its not exact, but the art market
does correlate strongly with more important
If his investment is a sign that Chinas elite
indicators, particularly stocks and oil.
are regaining confidence in their economy,
Or to put it another way, if the oil barons
that could be good news for the art market
are sitting on their auction paddles, that
all around, as Celarier puts it. If theyre
may not bode well for equities.
not, however, the key question at art sales in
October and November will be not where
So with the autumn season now under way,
are the Brits?, but where are the Chinese?.
the skittish art market is facing a series of

Auctions
Going

A locker key from the Titanic,

with Locker 14 F Deck
etched onto it, is
expected to fetch
50,000 tomorrow
at auctioneers Henry
Aldridge & Son
of Devizes, Wiltshire.
It belonged to Sidney Sedunary, a
23-year-old steward from the Shirley
district of Southampton, who died when
the passenger liner sank in April 1912 after
striking an iceberg in the North Atlantic
on its maiden voyage. After his body

MONEYWEEK

21 October 2016

was recovered, his

possessions, including
the key, were sent to his
pregnant wife, Madge.

Gone
In April, a sextant used for navigation by
Sir Arthur Rostron, the captain of the RMS
Carpathia, which rescued survivors from
the Titanic, sold for 66,000 at the same
auction house. Captain Rostrons
prompt response to the disaster
is credited with the saving of
700 lives.

Hiding art from

the taxman
The case against Guy
Wildenstein, head of the
famous French family of art
collectors, entered the final
stretch in Paris this week.
The prosecution accused
the family of the longest
and most sophisticated
fraud of the Fifth Republic.
Wildenstein and his clan
are accused of hiding a
catalogue of masterpieces
from the French taxman,
along with racehorses and
even the Kenyan ranch that
appeared in the film Out of
Africa. The prosecutor has
demanded Wildenstein pay
a 250m fine and serve four
years in jail; the taxman
says he is owed 550m.
Wildensteins father, Daniel,
who died in 2001, created
offshore trusts, including
one in the Bahamas that
held around 2,500 artworks,
notes Bloomberg. Among
the works listed in the trial
are a Gustave Courbet,
Biche Force, Effet de
Neige, valued at 8.2m, two
works by Pierre Bonnard,
worth 2.3m each, and
Mme Georges Wildenstein
by Picasso, valued at
1.6m. The court put a total
value of $875m on works
scattered around the US,
Switzerland and Singapore,
many of which only came to
light following complaints
from disgruntled widows
and divorcees.
The works were no longer
legally the property of
the Wildensteins and not
eligible for tax, the defence
claims. The prosection
argues the trusts were
not truly independent and
were used by Wildenstein
and his brother, Alec, who
died in 2008, to fund their
lifestyles. Guy Wildenstein
claims he knew little about
the financial arrangements
put in place by his father
and brother.

moneyweek.com

XX

crossword
crossword

Tim Mooreys Quick Crossword No. 816

Bridge by Andrew Robson

A bottle of Taylors Late Bottled Vintage will be given

to the sender of the first correct solution opened on
2 November 2016. Answers to MoneyWeeks Quick
Crossword No. 816, 8th Floor, Friars Bridge Court,
41-45 Blackfriars Road, London SE1 8NZ.

West side story heartache

37

On our Three No Trump deal, almost all Wests tried the knave of
spades opening lead. It is neither the most active (a diamond), or
passive (a heart or club) lead, but it does offer a little each way.
How should declarer play to trick one, with hearts extremely
vulnerable from the West side?
Dealer South

East-West vulnerable
K85
K4
J98
Q10875

J107
632
KQ53
643

Q42
AQ10987
762
J

E
S
A963
J5
A104
AK92

Eight clue answers need one extra letter added to make different answers to be entered.
If you add the correct letters, a 20 down, 2 down (8 letters, 3 words) is thereby made from
added letters. Shade the homophone of a competitor, one of the other answers.
ACROSS
1 Farmers livestock (6)
4 Cupids projectile; a pointer (6)
8 Nations; says (7)
10 Madeira and Bordeaux, for example (5)
11 Warning of danger (5)
12 Supplying with weapons (7)
14 Many times (6)
16 Sharpened; moved gradually
and obliquely (6)
18 Singer of Night and Day (7)
21 Costa _____, a republic (5)
23 Extremely (5)
24 _____ Chapel of the Pope (7)
25 Disguised (6)
26 Evening (6)

DOWN
1 Deep cracks in a glacier (9)
2 Handle; championship (5)
3 A Beatles album (3, 2, 2)
5 Fighting (2, 3)
6 Current; a sport (7)
7 Existed previously (3)
9 Broadcast; female mammal (3)
13 A sponsor at baptism (9)
15 Theyre often said to
be keepers (7)
17 US writer; sore men (anag) (7)
19 A herb (5)
20 IVR abbreviation for Oz (3)
22 Cake topper (5)
23 Tall, deciduous tree (3)

Tim Moorey is author of How To Crack Cryptic Crosswords, published by

HarperCollins, and runs crossword workshops (TimMoorey.info).

Taylors, a family firm for over

300 years, is dedicated to the
production of the highest
quality ports. Late Bottled
Vintage is matured in
wood for four to six years.
The ageing process
produces a high-quality,
immediately drinkable
wine with a long,
elegant finish; ruby red
in colour, with a hint of
morello cherries on the
nose, and cassis, plums
and blackberry to taste.
Try it with goats cheese
or a chocolate fondant.

moneyweek.com

Solutions to 814
Across 1 (W)hitman 5 (B)lake
8 Friar 9 T S Eliot 10 Rum
11 Serengeti 13 Do(n)ne 14 Bu(r)ns
17 Mount Etna 19 Dad 21 In haste
23 Noise 24 Hard(y) 25 Marvel(l).
Down 1 Wafer 2 Idi Amin 3 Mares
nest 4 Notary 5 Bee 6 Agile 7 Entried
12 No-brainer 13 Dampish 15 Red
wine 16 Stream 18 Usher 20 Dwell
22 Sky.
The winner of MoneyWeek Quick
Crossword No. 814 is: Mrs B Lindley
of Buckfastleigh.
Answer to Guess the price column
800,000 Fine & Country
01291-629799.

The bidding
South

West

North

East

1NT(15-17)
pass

pass
pass

3NT

pass

There are three attractive alternatives. First, to duck the spade in

both hands. This is not best in theory, but in practice it will be very
hard for West to find the heart switch. Many declarers went this route
and all made their contracts: when West continued a second spade at
trick two.
Second, to win the ace of spades, then lead to dummys king.
This was the line favoured by the Polish declarer. No good, as it
telegraphed the position. East threw his queen of spades under
dummys king, West won the third spade and a heart was immediately
on the table. Down three.
Third, to win the ace of spades and lead a spade to dummys eight.
East won the queen, but with king of hearts protected from the
East side, declarer was able to score three spades (including his
established 13th), a diamond and five clubs. Game made.
For all Andrews books and flippers including his new booklet
Counting and Card Placement see AndrewRobson.co.uk.

Sudoku 816
9 3
3

4 8

7 3

3
6 4

2
4
5

8 1

1
7
2 3

MoneyWeek is available to visually

impaired readers from RNIB National
Talking Newspapers and Magazines
in audio or etext. For details, call
0303-123 9999, or visit RNIB.org.uk.

To complete MoneyWeeks
Sudoku, fill in the squares
in the grid so that every row
and column and each of the
nine 3x3 squares contain all
the digits from one to nine.
The answer to last weeks
puzzle is below.

3
9
4
6
1
5
8
7
2

7
6
8
4
2
9
5
1
3

1
5
2
7
8
3
9
6
4

2
3
9
5
4
7
1
8
6

5
8
7
1
3
6
2
4
9

21 October 2016

4
1
6
8
9
2
3
5
7

8
2
1
3
7
4
6
9
5

6
4
3
9
5
1
7
2
8

9
7
5
2
6
8
4
3
1

MONEYWEEK

lastword
38

XX

last word

The best thing to do is panic

When things go wrong, they go more badly wrong than you expect

When things go wrong, they go

more badly wrong than you expect.
Hurricanes in this part of the world are
routine. We know what to expect. People
should be prepared. And yet, when push
comes to shove, their best-laid plans get
shoved into a ditch. How do you escape
a hurricane? You go visit your sister for a
few days. Easy-peasy. With the hurricane
still 36 hours away, youd think youd
have plenty of time. But already, your
neighbours are panicking. When you go
to the bank to get cash, its been cleaned

In the hurricane, the panic was limited

and easily controlled. There were only
a few areas where there was any real
danger. People knew what to expect.
And they knew that when the storm
left, life would soon return to normal.
Its not the end of the world. But
imagine a financial panic. Almost no one
understands what causes it. Almost no
one is prepared for it. No one knows how
long it will last. No one knows what the
world will be like when it is over. And it
is worldwide. Theres no escape.
The next major panic in the financial
markets is likely to be the end of the
world, in the sense that the world we
take for granted will quickly disappear.
Most likely, it will begin with a major
bank failure, followed by a sharp sell-off
on Wall Street. Central bank chief
Janet Yellen will tell us the situation
is under control. Central bankers will
promise more stimulus measures. But
the panic will intensify.
The crisis will move too fast for
policymakers and too fast for investors.
Stock investors tell themselves they will
get out when the bear market begins.
But when a real panic starts, its too late.

The bottom line

$40m How much American comedian and actor Chris Rock

(pictured) is rumoured to have been paid to make two
stand-up comedy specials for streaming
service Netflix.

43

iStockphotos

Last week, we got a peek at the end

of the world. As Hurricane Matthew
approached the coast of Florida, a panic
set in. Petrol stations ran out of fuel.
Stores ran out of food. Banks ran out of
cash. Evacuate or die, we were told.
Not wanting to do either, we rented a
car and drove to Maryland. But skirting
the coast in northern Florida, Georgia,
and South Carolina, we saw the disaster
unfold beneath us. The roads into
Savannah, Beaufort, and Charleston
were closed. Traffic was at a standstill.
People must have spent whole days just
going a few miles to higher ground, or
they were trapped wondering how high
the water might rise.

In stocks and bonds? Evacuate or die

World stock and bond markets represent
about $150trn. A rerun of the panic of
2008 could erase $30trn in just a few
weeks. Or, if the panic is caused by
rising inflation, the bond market would
be walloped too: losses could rise to
$75trn or more. The feds could offer a
few hundred billion in bailouts, but that
would be nothing, not compared to a
market that is losing $10trn every
week! Our advice: Panic now, before
everyone else. Evacuate overpriced and
dangerous investments.

680 The number of bank branches that closed last

year in Britain, leaving rural towns and villages with

a shortage of hard cash, the Federation of Small
Businesses has found.

313m

The percentage of houses in Britain that

fail to meet all five factors of housing charity
Shelters new Living Home Standard, which
considers affordability, neighbourhood, condition,
stability and space.

The reported price of Russian

oligarch Andrey Melnichenkos new superyacht,
Sailing Yacht A. With masts of almost 300 feet,
it is the worlds tallest sail boat and has a helipad,
pool and underwater lounge.

6trn How much in Korean won (around 4.3bn)

367 The number of Americas Fortune 500

Samsungs exploding Galaxy Note 7 smartphones

which have now been pulled are expected to cost
the Korean tech giant, according to the companys
estimates.

310m How much millennials people aged between

16 and 35 are set to spend on Halloween this year, up
from 295m in 2015, says consumer analyst Mintel.

MONEYWEEK

21 October 2016

companies that have at least one subsidiary based in

a tax haven.

140m

The value of an enormous jade rock, weighing

175 tonnes, that has been unearthed at a mine in
northern Myanmar. The near-translucent precious green
stone is particularly prized in China, where it is known as
the stone of heaven.

moneyweek.com

oscars.org

Bill Bonner

out already. Your flight is cancelled.

You cant find petrol. You cant even get
a good meal. You try to remain calm.
And yet, you can quickly be caught up
in a situation you cant control forced
to evacuate with thousands of others.
Or worse: caught on the highway in a
torrential downpour or swept away by
the floodwaters.

The Week_Classic advert_OL.indd 1

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