Posts Tagged ‘london’

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By one very important measure, stocks are set to crash. This will not be any old crash, but a really major one – as significant as 1929, 1987 or what we saw in 2000 and 2008. And the measure that tells us this is not some obscure ratio, familiar only to academics locked away in ivory towers; it is the ratio that many of the world’s top investors say is the single most important ratio they use to judge whether or not stocks are overvalued. Yet despite this very powerful evidence to say we are set to see a crash, many say that this time it is different. Are they right this time?

The measure that looks so dangerously elevated is called the CAPE – or the cyclically adjusted price earnings ratio. It is calculated by taking the current capitalisation of stocks, and comparing it with average earnings over the last ten years.

For US stocks right now the CAPE is 23.8. The long term average is 16.5. Ergo US stocks are overvalued. And although stocks listed in London are not as expensive, the markets across the world tend to follow the US. If US stocks crash, others will follow, regardless of fundamentals.

Bullish defenders of US stocks are saying: “This time it is different.” And they are greeted with derision. There is one golden rule in investing. When people say: “this time it is different,” sell.

It is just that when you think about it, of course, US earnings over the last ten years have been low; the US economy has suffered a very nasty recession. The CAPE, they say, is distorted by the unique, and never to be repeated experience of 2008.

Besides, add the bulls, the CAPE is not the only measure. Look at current PE ratios, look at stock values to net assets, look at a myriad of other measures, and stocks don’t look that expensive at all. They can even turn the “this time it is different” argument back on their critics, and say: “but by a long list of measures stocks are not expensive, why do you think they will crash?” To the bears they might say: ”Are you saying this time it is different?”

But then we get a counter argument. Sure, the US has suffered one mother of a recession, but corporate profits did surprisingly well. The truth is that corporate profits to GDP are close to an all-time high. The argument continues, if the ratio returns to its historic average, earnings will fall, even if GDP rises.

And finally just to retort to that argument about profits to GDP being high and thus they will fall, some might say: “Yes it is true that profits to GDP are exceptionally high, but this has been a bad thing, and it may have been a factor that triggered the crisis of 2008.” To explain this argument, see it this way: the economy needs demand to rise for growth to occur. If profits to GDP are rising and wages to GDP are falling, demand can only occur if people borrow more. Hence high levels of debt were a symptom of rising profits squeezing wages. If we see the ratio return to average, that will be good for the economy, and in the long run, what is good for the economy is good for company profits.

So where does that leave us? If profits to GDP fall, that may be negative for stocks in the short term, but positive in the long term. If profits to GDP stay where they are, that may lead to earnings rising with the economic recovery, justifying stock valuations, but this may not be so good in the long run.

© Investment & Business News 2013

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Facts don’t seem to be all that important. If you want to express an opinion on immigration, it appears what matters is who can shout the loudest, and who is best at riding the latest populist wave. Many people say that immigration is the most important issue concerning the UK today. How about this for a contrary view? It may be more accurate to say the way in which the topic of immigration is portrayed in the press poses the single biggest threat to the UK today.

Let us look at some of the arguments often bandied about. First off, the UK is swamped by immigrants. The OECD has taken look at data on immigration flow for 2011 (or for the latest year for which data is available) for 24 of the largest OECD countries. The country with the largest inflow of immigrants was Switzerland, followed by Norway, then New Zealand, Australia, Sweden, Spain, Ireland, Denmark, Canada, Belgium, Austria, the Netherlands, and then the UK. In fact, migration inflows into the UK were less than the OECD average.

Now look at the migrant population, which is to say the percentage of population for each country who were foreign born. In the case of Luxembourg, the number stands at around 40 per cent. The OECD average is around 13.1 per cent; it is 12 per cent for the UK. In fact across 32 OECD countries, 15 have a higher proportion of their population who are foreign born, while 16 have a lower proportion. In other words, the UK is below the mean average and just above the median average.

What many people forget when talking about immigration is the other side of the coin: emigration. Setting aside the fact that immigration into the UK is below the OECD average, what many overlook is that the UK also sees a high level of emigration. According to the ONS, “500,000 people immigrated to the UK in the year ending September 2012, which is significantly lower than the 581,000 who migrated the previous year…. 347,000 emigrants left the UK in the year ending September 2012, similar to the estimate of 339,000 in the year to September 2011.”

So why are people entering the UK? There are lots of reasons, of course. But according to the ONS, “Study remains the most common reason for migrating to the UK.” But if people enter the UK to study, this is unambiguously a good thing. Foreign students bring money into the UK. That this number is so high is testimony to the strength of our universities. This is to be applauded. But, according to the ONS, “In the year to March 2013, there were 206,814 visas issued for the purpose of study (excluding student visitors), a fall of 9 per cent compared with the previous 12 months.” This is surely disastrous news, but such is the attitude towards immigration in the popular press that this worrying trend is barely mentioned.

What about the drain on public finances? OECD data suggests immigration made a 0.46 per cent fiscal contribution to the UK in the most recent year for which data is available.

What about the argument that immigrants take our benefits? Take for example data on Polish Immigrants. It turns out that around 7,000 Poles receive job seekers’ allowance, when there are in the region of 500,000 Poles in the UK. Does that strike you as a high number?

According to the Department of Work and Pensions, “As at February 2011, 16.6 per cent of working age UK nationals were claiming a DWP working age benefit compared to 6.6 per cent of working age non-UK nationals.”

Then there is the rather old argument that immigrants take up hospital beds; that the NHS cannot cope. Well does this argument lack joined up thinking or what? Is it not the case that immigrants are an important source of labour for the NHS?

The truth is the UK has always been a country of immigrants. From the Anglo Saxons, to the Vikings, to refugees fleeing from the French revolution. Many of our kings and queens were immigrants too. Richard the Lionheart couldn’t speak English. King George I and II were German through and through. Prince Philip is Greek; Prince Albert was German.

Isambard Kingdom Brunel was the son of a Frenchman. The man who did more than anyone to define British classical music, Handel, was an immigrant. And coming up to date, perhaps the most important British innovation of the last decades was the discovery of graphene, by Andre Geim and Konstantin Novoselov at the University of Manchester. Both men were Russian born.

In the world of sport, where would British success have been in the last Olympics if it had not been for Jessica Ennis, whose father was a Jamaican born immigrant, and Mo Farah of Somalian birth?

Immigration is not always a good thing. The UK is small country and its capacity for accepting many more people is limited.

On the other hand, the UK, like much of Europe, faces a major demographic shock, as its indigenous population ages. Immigration may be all that stands between the UK experiencing a Japanese style lost two decades.

The real issue here, however, is that we rarely hear the pro-immigration arguments. Instead we send a van around East London, telling immigrants to go home. This is just plain nasty, not to mention utterly bizarre.

Many of the tabloid newspapers have become mouthpieces for the anti-immigration lobby.

David Cameron is courting the anti-immigration lobby, trying to score cheap points by saying: “We hate immigrants more than Labour.”

Our leaders are failing us. Mr Cameron is an intelligent and decent man, who is letting opinion polls dictate policy over his true beliefs. Tony Blair made the same error. At least that was one crime that we could never have accused Mrs Thatcher of committing.

Right now, our leaders should be leading, correcting myths, and promoting an objective discussion of this incredibly important topic. Instead they ride the surf created by an increasingly hysterical media, and it is very, very dangerous.

© Investment & Business News 2013

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As you know, we are ageing. We are all literally ageing, of course; there are no real life Benjamin Buttons out there. But as a country and as an economy we are ageing too, and that means there could be a pension problem in the future. The solution is obvious. We all have to save more, throw more money at our pensions. Or do we? A new report suggests that this approach may be flawed.

According to EuroFinUse: “Recent OECD statistics have cast a dark shadow over the aspirations of private pension savers. Over the last 5 years, real returns from private pension funds (after inflation) have been negative in many EU Member States. They have failed to hold their purchasing power, setting a gloomy outlook for tomorrow’s pensioners.”

In fact the real return (that’s after inflation) on five years’ pensions across Europe has been just 0.1 per cent over the last ten years and negative and minus 1.6 per cent over the last 5 years – at least that is what the OECD shows on the products and countries it covered.

EuroFinUse stated: “Despite such concerning results, the OECD still strongly recommends that citizens should make a greater contribution to personal pension provision. When advising people to save more, public authorities should bear in mind that pension saving products are in many cases destroying real value of citizens’ savings. This is why providers and public authorities should seek to protect the long-term purchasing power of savings, before advising citizens to increase those.” See: The Real Return of Private Pensions 

Actually, when you think about it, the report should not really come as a surprise. Many pension funds in an attempt to meet solvency laws, have been flocking to bonds, even though such bonds pay out lower percentage yields than inflation.

The truth is that many pension funds have been paralysed by the regulator into becoming so risk adverse that they threaten to bring down the economy. The economy needs risks; there is no such thing as risk free. The obsession with risk free in recent years has ironically created more risk.

That is why investing under your own steam, privately rather than via a pension fund is interesting.

And here is a thought to leave you with. A recent article in ‘Fortune’ magazine quoted London’s Tech City CEO Joanna Shields as saying that not so long ago her employees scoffed at stock options. They wanted pensions. She says that today that they all want to be the next Mark Zuckerberg. See: What London can teach Silicon Valley 

If you want a secure retirement, saving for a pension may be a partial answer, but stock options and investing directly, without the straitjacket of a pension fund and its requirements, may provide a better alternative

© Investment & Business News 2013

According to data from Lloyds TSB, the sales of homes worth over one million pounds hit 7,397 in 2012, which was the highest level since 2007. Is this a sign of a recovering economy or is it a case of economics for the one per cent?

Nobel Laureate Paul Krugman excelled himself this time. In his latest column for the ‘New York Times’, ‘The one per cent’s Solution’, he said: “The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top one per cent wants becomes what economic science says we must do.”

He continued: “The years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The one per cent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.”

And finally: “We have a policy of the one per cent, by the one per cent, for the one per cent.”

Do you agree with that? Or is Paul Krugman getting a bit extreme?

To change the mood a little, Lloyds TSB says: “The total number of sales of properties that cost at least £1 million in Great Britain rose by 2 per cent from 7,270 in 2011 to 7,397 in 2012.” By the way, in case you are interested, in 2007 sales of one million pound plus houses hit 8,233.

The growth in sales of these more expensive homes has been skewered towards London. Lloyds TSB said: “London and the South East continued to account for the overwhelming majority (85 per cent) of all million pound sales in Great Britain in 2012. Million pound sales are a much greater proportion of the market in London than elsewhere in Britain, representing 5.6 per cent of all sales in the capital in 2012. Scotland (14 per cent), the East Midlands (12 per cent) and Greater London (6 per cent) were the only regions to see a rise between 2011 and 2012.”

It continued: “The remaining eight regions in Great Britain recorded a fall in million pound sales in 2012. Wales saw the biggest drop in million pound sales (-71 per cent), followed by the north east (-40 per cent).”

So how do we interpret these figures? Are they a sign of Krugman’s theory about an economy that only seems to be benefitting the one per cent – although in London, of course, one million pounds for a home is not that out of the way. Alternatively, are the figures just indicative of the London/South East divide with the rest of the country? Or maybe, just maybe, it is a sign that the housing market is turning; after all past housing market booms have begun with the more expensive properties.

© Investment & Business News 2013

It’s a bold plan. If it works well, the people behind it may deserve a medal or something. The dream is nothing less than to help London compete with Silicon Valley. For start-ups, companies with bold ideas to expand, and indeed for investors, it’s exciting stuff. Can it work?

Tech London Advocates, founded by Russ Shaw, formerly Skype Vice President and Telefonica Global Innovation Director, was launched yesterday.

It says that it wants to: “Establish London as a world-class hub for digital and technology businesses.” So it is aiming pretty high then.

How can it achieve such lofty ambitions? Well, the big idea is to facilitate partnerships between start-ups and FTSE-250 businesses, major international companies and investors.

Tech London Advocates says: “The group will focus on providing the capital’s technology entrepreneurs with the business networks they need to take their companies into high growth. It will act as a cross-sector presence within London’s technology community, working with government organisations including Tech City Investment Organisation and UKTI, and addressing issues that affect London’s ability to support growing technology firms.”

Russ Shaw, founder and chairman of Tech London Advocates, comments: “The biggest problem start-ups face in London is getting to the right people that can deliver the necessary investment, talent, connections that lead to powerful partnerships, teams and ultimately growth. Tech London Advocates believe that this is a simple problem to solve. Using their relationships, contacts and networks they are pledging their support to early stage tech companies in a bid to make London the tech hub it should to be.”

These are worthy goals. It is easy to be cynical, but in all seriousness, it is plans like these that the UK needs.

The snag to all this is culture. According to a survey carried out by Euromonitor, when asked should a business be formed if there was a chance it might fail, no less than 43 per cent of Brits said no.

This is a shameful statistic.

Now consider the media, its preoccupation with the property market, and when it does cover entrepreneurs it does so with programmes such as ’The Apprentice’ and ‘Dragons Den’ that are so removed from reality, that it is like presenting the latest ‘Spider Man’ film as a documentary for the US defence department.

Well done Tech London Advocates, but where is the media in talking up the plan – and indeed Britain – for once?

©2013 Investment and Business News.

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Many have speculated that 2013 will be a year of rising house prices, thanks largely to the funding for lending scheme. Others say changes introduced to supporting both would-be and existing home owners in the recent budget will lead to rising house prices next year and beyond.

These predictions may be right, but property bulls often forget to mention that real wages have been falling for over two years, so low rates or not, there ain’t much spare money out there among households at the moment.

What we can say is that the monthly report from the Royal Institution of Chartered Surveyors (RICS) does not provide much support to the rising house prices theory.

In fact the survey’s main headline index seems stuck at a level consistent with zero growth.

The index is produced by asking surveyors if house prices went up or down in their region. The percentage number who said down is subtracted from the percentage number who said up. So if the index is less than zero that means more said down that up.

The interesting thing about this index is that it has proven to be a good forward indicator. The index is not very volatile, usually recording modest changes on the respective previous month. But when it does change significantly those changes tend to stay in place for a while and other surveys tend to show complementary results for some time afterwards. In short, the RICS index is good at predicting change.

Last year it got steadily better, rising from minus 23 in July to minus seven in October. Since then the steady improvement has either slowed or perhaps stopped completely. In November the index was minus nine, then minus one in December, and it seemed on course for going into positive territory. But in January the index fell back to minus 4 and then minus 6 in February.

So what would the March reading be? Well it was minus one.

That elusive jump into positive territory is proving to be precisely that: elusive.

RICS did say that the number of houses sold in the UK during March was at a three year high. So maybe it is just a matter of time before we see the predicted rise in house prices. Maybe, but as was said earlier, it is difficult to see how households can really afford to run up much bigger mortgages.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

They used to talk about the bells of Shoreditch. You might recall the words ‘When I get rich, say the bells of Shoreditch’. Better than the oranges and lemons offered by the Bells of St Clements.

These days the area is more known for its roundabout,  or silicon roundabout as it is called. For this has come to symbolise an attempt to create a rival to California’s Silicon Valley in the east end of London. The UK government has come together with Tech City Investment Organisation to try to realise this dream.

On Sunday, a Vice President of Facebook – Joanna Shields – who also happens to be Managing Director of Facebook Europe, Middle East and Africa, was chosen to be the new head of the Tech City organisation.

She will start in January.

As a dotcom star, her credentials are impressive. Ms Shields has been a President at AOL, responsible for social and communications businesses, and previously served as chief executive of Bebo. She has also been Google’s Managing Director for Europe, Russia, the Middle East & Africa.

On the news of her appointment she said: “Throughout my career I have had the privilege of working with great entrepreneurs and innovators to create thriving new businesses and industries. The seeds have been sown in East London for a dynamic and successful cluster: we have the infrastructure, the technology and the talent, now we need to accelerate the growth. I am looking forward to leading the Tech City Investment Organisation in the next phase of its development. With the right boost now, there is no reason why we can’t make London the number one location for tech in the world.”

Bold words indeed! If her stated objective can be realised, then for once we would have to cast aside cynicism, and say “well done”.

But right now there are critics. For one thing, Facebook has not been paying much tax in the UK. It’s been in the media this week. Last year the company apparently only paid around £2oo,000 tax from sales of £20.4 million. It’s an embarrassing one for Ms Shields to explain away. She admits she has received some pretty stroppy emails on the subject, but suggests that now it’s different. Since the government is actively promoting the area, its tech occupants will be happy to have their tax domicile in the UK. It’s a kind of quid pro quo. “We do this,” says the government, “you reciprocate.”

But there are other criticisms. James Dyson, for example, says that all the government is doing is forcing up rents in the region, making it all but impossible for other companies to operate. Those are companies which produce real things, things you can see and touch; things like… I don’t  know… vacuum cleaners perhaps.

And that brings us to another criticism.

What does Facebook produce? Some say nothing, literally nothing, it produces ether. It trades in a kind of Ponzi scheme, in which its one real asset is popularity, and it’s popular because… well because it’s popular.

For that matter, these same critics might say the same of AOL, Google and Bebo. So goes their critique: how can a woman who has excelled in selling ether do something real, like create a hub to power the UK economy?

Then there is the anti-London argument. ‘Why London?’ they ask?

And finally, the anti-immigration brigade can always be called in to support the ‘no to silicon roundabout campaign’.  For the Cameron government plans to allow certain rules making it easier for budding tech entrepreneurs in silicon roundabout to migrate to the UK.

Some of the criticism may be fair. Most is off the mark.

On the topic of immigrants, hubs like London’s tech city need them.  For that matter, so does Silicon Valley, which to a certain extent was built by immigrants . Not literally built, but the ideas and the social network, and Silicon Valley’s culture was built by them. But the US is tightening up on rules regarding immigrants – really tightening up.  From Uncle Sam’s point of view it’s a highly dangerous move. After all the US is a country of immigrants. It is they who made it so dynamic. It is no good bringing up the drawbridge and expecting the US to continue to enjoy economic dominance. So the mistake in the US is the UK’s opportunity, though no doubt the ‘Daily Mail’ will try to stop it.

As for the argument that Tech City is based on vapour ware companies, well that is surely wrong. You would hardly expect ‘Investment and Business News’, which exists solely because of vapour ware, to agree with that.

The thing is that the UK does produce excellent designers in tech. Remember Jonathan Ive? He’s the man behind the iMac, iPod, iPhone and iPad. Even Steve Jobs recognised how crucial he was to Apple. He still is crucial, of course. Then there is ARM, the chip company that designs the chips that sit in so many mobile devices, including Apple’s products. ARM grew out of 1980s computer company Acorn.

The UK’s problem is that it has failed to convert design brilliance into creating British companies that shake the world. For Tech city to be a true success, it needs to create some of the can-do spirit that encapsulates Silicon Valley; the real dynamism that sees investors willing to consider most ideas, and a culture immersed in the idea of innovation.

Silicon Valley was not deliberately created. It created itself. But that is no reason to think that trying to create something similar in London, one of the most important cities in the world, isn’t a dream worth pursuing, or indeed is an unrealistic dream.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here