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David Kempton: my path through the euro wreckage

Awaiting a major 'euro event' to clear the air, David Kempton reveals the funds, trusts and shares he's willing to hold.

 
David Kempton: my path through the euro wreckage

A major European shakeout is looming, and until it passes I'm going to watch from the sidelines as world markets swing violently, influenced by every barely credible statement from our leaders. My prediction is that the future will be shaped by a major euro event, followed by a bout of powerful inflation. 

While this plays out I'm still sitting on my hands, with cash – all in US dollars – forming a larger proportion of my portfolio than I can ever recall.

All talk, no action

Mario Draghi, the head of the European Central Bank, says ‘we will preserve the euro, whatever it takes’, but how? No details were supplied, and Italy's €1 trillion of debt is only rising. So where can that sort of money come from? The prosperous industrial areas north of Rome are drowned by the debts of the south of Rome. The Spanish regions fight among themselves while Catalonia is asked to bail out the rest.  

I despair of our politicians as they move inexorably from one gaffe to another. Many French people despair of president Francois Hollande, and some are leaving the country, terrified of the unknowns which lie ahead. The non-doms now rent houses, don’t buy cars and don’t rent fixed-line phones, such is the fear.  

US numbers have taken a serious turn for the worse recently. My own favourite indicator is the American housing figures, which I think hold the key to any improvement. But these do not bode well at the moment. 

Only German chancellor Angela Merkel commands respect as she continues to steer her country through the minefield, attempting to keep the euro alive while placating her own electorate.

Biding my time, playing it safe

Meanwhile, I am building a buying list and am bursting to get back in with some exciting stocks, but fear we will see them fall before we get clarity, which will probably not be until the fourth quarter or perhaps even into early 2013. I maintain some holdings, as it is too risky to be right out of the market. My biggest positions are in collectives where I can rely on a manager to watch events 24/7 and respond accordingly. 

I've kept my holdings in Murray International , Finsbury Growth & Income , Hawksmoor Vanbrugh (I’m a director of the management company), Newton Asian Income , CG Assets Dollar Tips Fund and the M & G Inflation linked Corporate Bond fund. 

More cash has gone into HICL Infrastructure , since I think infrastructure funds offer a safe source of high income, with inflation built in as the underlying rentals are mostly inflation linked.

Sticking with resources

I have also held all my resources stocks, some of which have halved in value, as cautious investors have fled to safer havens, leaving behind some stunningly cheap valuations. Their time will surely come again. 

I remain mindful of the risks, of which the hardest to read is probably resource nationalisation, where sudden taxes, royalties, enforced partnerships or other means of the host country taking a slice, seems to have become an unpredictable feature in the emerging world. One can have some sympathy with this, but the unpredictability makes it hard to assess a company’s net worth.

I have held on to my oils too, but do worry about the new world of US energy self sufficiency. Nobody seems to have factored in that the US has enough cheap gas now for the next 100 years, and may even become a net exporter of gas and oil, killing any thought of nuclear development, which is now uneconomic. 

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10 comments so far. Why not have your say?

William Phillips

Aug 02, 2012 at 13:59

On infrastructure, note that despite the pitch on which the sector launched, neither HICL nor the rest have succeeded so far in furnishing an income stream rising in line with retail price inflation.

Uncertainties in an era of spending cuts about the covenant between different types of sub-governmental customer for PFI projects and the suppliers (see John Laing Infra and its Kent NHS trust) have clouded the asset valuation assumptions of these novel vehicles as well.

Can we be sure that Whitehall will promptly extend full faith and credit to its defaulting subsidiaries to placate the shareholders of infra funds? Or will it dilly-dally over compensation procedures? An awful lot of NHS hospital administrations are in low water.

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david kempton

Aug 02, 2012 at 17:09

That's interesting, thanks. I will look at the Laing - Kent issue

There hasn't been much inflation since these funds got going. Not all the assets are UK Gov, but in any event, one would expect upward reviews in rents at least in line where such inflation exists

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Alanp

Aug 02, 2012 at 17:24

The point re US shale gas is well made. and if you look at developments in Gas to Liquids (GTL) technology the new natural gas resources have potential to partially displace gasoline as a transport fuel in the US

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Dimitrios Philippelis

Aug 02, 2012 at 21:23

You did not notify me why you have not published my comment which was number one in today's morning. Do you use censsorship as Chinese do?

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Dimitrios Philippelis

Aug 02, 2012 at 22:28

"A major European shakeout is looming, and until it passes I'm going to watch from the sidelines as world markets swing violently, influenced by every barely credible statement from our leaders. My prediction is that the future will be shaped by a major euro event, followed by a bout of powerful inflation."

Predictions are made by those who are unable to understand the present and misunderstand the past. The only way to anticipate the future is to prepare it and do not get the knowledge of it through the crystal ball of the old lady's magician or reading signals in the sky. The wishful thinking of all analysts do not allow them to be objective and true. Yes, trading is a path to financial independence but few are those who come victorious. Yes, trading is a perfect business.

You should read Robert Mundell, father of the euro, the Optimum Currency Area thesis to understand why the euro will be the winner because what it happens is planned and expected.

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JR (NOT EWING)

Aug 03, 2012 at 01:35

It looks as if theEuro will only survive if The EU is run as a series of "Vichy" Provinces - which may well not suit the Peoples of those countries. A major founder of the E.U. was Alterio Spinelli,a lifelong Italian Communist see http://www.brugesgroup.com/eu/godfather-of-the-european-union-altiero-spinelli.htm .Eventually the people of the USSR revolted and brok it up, which is the obvious fate of the undemocratic EU Empire. the Euro was intended as the lock on, as Kohl put it, "an Indissoulible Union". it was/is an economic Titanic, and even when launched it was leaking badly in the South, with its economy built on cheap debt. But that did not matter to the Captain and senior officers on the top deck, too busy with P.R and propaganda.Mario Draghi and his Band play on, in the belief that Angela Merkel will guide the German lifeboat alongside and lock onto and so hold up the sinking Euro. The Euro has too much debt for that to work - so the quicker it is dismantled the better for the partcaipnts in Euroland. There is no growth because too much is squandered on no productive Bureaucracy and its uneconomic "orders". set the Nations free and they will prosper- freed of the weight of inefficient, restrictive, and expensive top down management!

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JETTE BARTON

Aug 03, 2012 at 04:01

Absolutely, the EU is not working unfortunately. To make that sort of thing go you need people with guts. The only person with guts is Angela Merkel and it is not in the interest of Germany to rescue the EU. However., Germany will not leave as it cannot live with a new DM. Therefore others must go and go soon. in fact the sooner the better.

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Geoff Harrop

Aug 03, 2012 at 09:33

JR is right. And so was that financially adroit man James Goldsmith who said the euro was a bad idea. Every idea that ever existed first occurred in the mind of one person - I wonder who first came up with this. An idealist rather than a realist.

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William Phillips

Aug 03, 2012 at 12:13

On the self-sufficiency of America in energy thanks to shale deposits-- see today's fiasco at BHP Billiton. It's fracking awful!

In a way this vindicates Mr Kempton's confidence. Sounds as if the US already has too much of a good thing for prices, though not all operators will have plunged into shale gas and overpaid as ripely BLT did last year with Fayetteville.

So... with all this new-found energy back home, can the nation founded by wise non-intervenors PLEASE stop rampaging round the Mideast trying to secure oil by invading unoffending countries and propping up tyrants? You just can't afford these lunatic, counter-productive crusades any more.

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Antonio VIvaldi

Aug 04, 2012 at 11:08

Jeez, is this what passes for "analysis" in fund management circles? "Many French people despair of president Francois Hollande, and some are leaving the country, terrified of the unknowns which lie ahead. The non-doms now rent houses, don’t buy cars and don’t rent fixed-line phones, such is the fear. " An ignorant drunk in the pub could do better than that. Unsubstantiated prejudice -nothing more. What circles do you mix in - multi-millionaires who think that paying taxes is for little people? Bah!

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