Thursday, March 31, 2011

Are cheap holidays for pensioners such a good idea?

Did you know that the Spanish government pays for over a million pensioners to go on holiday every year? There is a program called IMERSO (Institute for Seniors Social Services) which aims to subsidise holidays for the retired community and does so on a grand scale.

The scheme is 25 years old this year and has given the chance of cheap holidays to millions of pensioners. The idea is that the state subsidises holidays within Spain (& Portugal), including travel, full board accommodation, insurance and entertainment, for anyone drawing a state pension.

The objectives are to provide a social benefit to the retired and to benefit the domestic tourist industry, particularly during the quieter months of the year. The price list is shown on the Spanish social security website and, considering it is "all inclusive", looks pretty cheap. For example, a week in Portugal for 182,70€ (per person based on two sharing). A month in the Balearic Islands for 590€.

Apparently it costs the government around 150m€ a year. Unsurprisingly travel and small business lobbyists, particularly in the tourist provinces are well in favour. They claim that the scheme actually generates a profit for government with the increased employment and tax receipts generated.

On that basis then maybe all the Spanish government needs to do is spray the subsidies around more generously. Maybe they could offer bingo subsidies or cover the cost of coaches to away football games or even arrange cheap shopping trips to Madrid and Barcelona. All these things would generate spending and commercial activity and thus boost the government coffers. Ed Balls, the Labour Shadow Chancellor, is offering a similar line of argument - more government spending "supports" the economy, promotes growth and will thus improve the public finances in the long run.

Forgive me if I don't buy into a word of this economically illiterate balderdash. Economies thrive when taxes and regulations are light; government finances thrive when they are responsibly managed and the books are balanced. Soviet-era subsidised charabang trips to the seaside are not the route to economic success.

From our website IVA Rates in Spain

Thursday, March 24, 2011

Japan quake rocks the uranium investment case

It was supposed to be another big "can't fail" commodity play like oil and precious metals, but since the Japan earthquake sent powerful shocks through the nuclear power industry investors who bought into uranium have cause to regret.

Before the horrendous disaster in Japan and the subsequent radiation leaks, I was seriously thinking of getting some, er, exposure to uranium. The bull case seemed pretty much irrefutable the more I looked into it:

- emerging market energy demand is growing remorselessly

- in particular, growing car use is making it ever more likely that the oil price will go stratospheric and usher in the age of the electric car

- if the world pays any attention at all to global warming fears, some of the new generating capacity will have to be nuclear. Many countries including the UK, India and China have nuclear expansion slated.

- once nuclear power capacity is built it will consume uranium for decades - the economics and science of nuclear practically lock in demand for uranium whatever the price (as was shown in 2007 and in the 1970s when the price was more than double its current level).

- one of the key sources of uranium to supply nuclear plants today is recycled material from decommissioned warheads. This is a finite source and will need replacing by new mining within a couple of years.

Lucky I did not pile into a uranium investment such as the large Canadian producer Cameco. The uranium price fell by 27% after the nuclear emergencies in Japan became news and Cameco's share price dived. Unsurprisingly given that nuclear has always been vulnerable to safety fears and is in any case always going to be a controversial choice of new power given how expensive it is and the issues surrounding nuclear waste disposal which have never been resolved. Germany has resolved to get rid of its nuclear capacity much earlier than planned and even China has paused its building of new plants.

Some sense a buying opportunity and indeed the uranium price has since rebounded somewhat. China and India are unlikely to scrap their nuclear plans altogether and in some ways Japan was the supreme "stress test" of nuclear power: if a Chernobyl was avoided in such extreme circumstances maybe that shows they are a risk worth taking. Just don't built them on the coast in an earthquake zone!

The real long term winners will be natural gas and renewable energy investments. The disaster will also underpin the already sky high oil price. Shares such as Shell, which is expanding and gets half its output from oil and half from gas, should be good long term plays even though their share price is close to an all time high.

From the Advoco website Contracting in Spain

Wednesday, March 16, 2011

Good news: the FTSE's falling!

For anyone thinking about what to do with their ISA allowance or are just looking for an alternative to the depressing returns available at their local building society, recent stock market events should have given plenty of food for thought. On the face of it, with the FTSE (and most world stock markets) falling, one thought would be - don't bother with shares, they are too risky. Look a bit closer though and you might come to a different conclusion.

The FTSE 100 has had a good run since the financial crisis, up 69% (84% if you include dividends reinvested). Share prices have fallen sharply though over the last few days perhaps on fears that the oil price rise, goepolitical instability and Europe debt fears will drag on markets. The Japan earthquake has taken share prices lower too. That suggests share prices have had a good run and the risks are on the downside going forward.

Maybe, and I don't propose to go into all the arguments here but I would highlight some other bits of recent news from the UK stock market concerning dividends:

** Morrisons announced it would be increasing its divi by 10% for each of the next three years and returning 1 billion £ to shareholders via a share buy back.

** Prudential announced a 20% rise in its dividends

** AMEC, the energy services and engineering company, announced a 50% hike in its dividend

If you focus on the underlying income that shares generate rather than share prices, the news is mostly excellent and actually has been very good over the last decade.

People often make a comparison with share dividend yields and bond or bank deposit interest. Currently you could get 2.5-3% from bank accounts and around 3.5% from the FTSE. The argument goes that shares are risky so they should be yielding considerably more. On that basis you should wait until share prices fall back and yields rise; in the meantime "play safe" in cash.

But I would argue that the comparison is false. Interest on bank deposits is static (or falls when unscrupulous deposit takers quietly lower their rates and hope you don't notice) whereas dividends should rise over time, if you pick shares in the right companies.

As an example, look at Tesco PLC which in 1998 was paying around 4p a share in dividends. Since then the dividends have grown 10% a year on average to stand at around 11p in 2010. Tesco yields around 3.25% but the key point is that if it continues to grow its earnings and dividends by anything like the rate it has achieved in the past, the yield (particularly with dividends being reinvested in more shares) will easily beat interest bearing accounts.

But will companies like Prudential, AMEC and the supermarkets continue to grow particularly if recession returns and some serious global crises unfold? I would argue that certain companies with pricing power (strong brands and competitive positions) and in key sectors (utilities, energy) should continue to grow their earnings even in an uncertain economy. Partly this is because they are good defensive companies we can't live without, and partly because the dividend only gives part of the picture. Back to Tesco - they may pay a dividend just over 3% but actually they earn more than twice that amount and that additional money is invested back into the business to underpin future growth.

So when you see share prices falling remember that it could just mean that a great source of growing income has just got cheaper. This certainly is the view of The Sunday Times Money editor Kathryn Cooper who wrote on Sunday: "high quality blue chips with solid dividend yields have been out of favour for three years; surely their time has come".

Thursday, March 10, 2011

Is Spain nuts to tax online gaming?

The Spanish government is to start taxing online gaming which has up until now got off extremely lightly. Do they risk driving the industry underground or offshore?

The Spanish Gambling Act pulls no punches and covers all forms of online gaming: poker, bingo, sports betting and football pools. Considering that these activities have not formerly been taxed at all, the proposed tax rates are extremely punitive. The rates vary between 10% (for poker played between individuals) and 30% for certain sweepstakes. Most activities are taxed at 20% of the gambler's stake.

The online gaming industry is most upset that these rates apply to the GROSS amounts wagered; they had lobbied for a tax only on net income after winnings had been paid out. The government turned a deaf ear to their requests (Internet gambling must also pay tax) more concerned about the loss of an estimated 315 million € tax than the feelings of the profitable website owners.

Of course the move could backfire in more ways than one. Experience of other countries, including Britain, shows that taxing online gambling portals drives the business offshore to places like Gibraltar. Also the government risks gaining a reputation for being "anti gambling" or "anti business" just when a big new casino investment is being proposed: Sands bonanza likely to prove a mirage.

What is it with governments these days? Can they not see that the correct way to deal with deficits is spending cuts and not tax increases. If tax levels were not sky high to begin with I could see the sense in it perhaps, but at the actual levels we have in the West most tax rises (certainly on incomes and corporations) is bound to prove counterproductive i.e. reduce revenues by destroying economic activity. As the UK government is now discovering with the 50% tax band and the "fee" on non doms which is driving away taxable wealth from Britain every day.

New article on our website Spanish tax rates for 2011

Thursday, March 3, 2011

Sands jobs bonanza likely to prove a mirage

It makes quite an attractive and beguiling thought for all of us in Spain concerned about where economic growth and especially jobs are going to come from : gambling will come to the rescue!

Papers last week were full of talk about a proposed Euro Vegas supposedly to be opened in Barcelona or Madrid. The Las Vegas Sands Corporation which operates casinos in Nevada, Macau, Israel and Singapore is talking about a new mega-gambling development which it says could create 180,000 jobs.

The corporation's boss Sheldon Adelson said the project was being "actively pursued" with both contractors and architects. The scale of the proposal is enormous - 20,000 plus rooms and acres of shopping, exhibition and conference real estate. To put that into context there are only 70,000 hotel rooms in the whole of New York and these are to be built from scratch by one company.

Not surprisingly the corporation thinks it will need the "support" of the Spanish government (i.e. subsidy money) for such a big project. The foreign investment, jobs potential and tourist pulling power of such a venture is going to seem very attractive to the national government in Spain not to mention the cities involved who are likely to compete fiercely for the project.

All the press in Spain and indeed in the US and Europe, reported the news like the project was a certainty and that the jobs were practically in the bag. However these grand plans have to be taken with a pinch of salt particularly the promises of hundreds of thousands of jobs which just raise hopes which will more than likely be dashed.

The plans seem very vague and the figures plucked out of thin air by Adelson (who was speaking to the press in Singapore not even Spain) probably to see if the government or city authorities will bite and hand him billions in subsidies or free land. He was talking airily about a resort 10 times the size of the Marina Bay Sands in Singapore which cost$ In this climate is he seriously talking about raising over 50 billion to spend on a green field project with no proven demand? I suspect it is pie in the sky - the same corporation was in discussion with Valencia two years ago about a big project but nothing came of it. A similar project has been touted (by a different group) in the province of Huesca promising :

"An investment of 17,000 million euros and include the construction of 32 casinos, 70 hotels, 6 major theme parks (and 12 small), museums, golf courses, shopping center and a racecourse" (Gran Scala Deadline)

But surprise, surprise nothing has been built yet and barely a million euros has been paid over for the land. Like casinos themselves it seems the gaming developers promise a lot but deliver mostly disappointment.

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