What is your view on the market given the last bout of instability and the banking reporting season?
At the time of writing the final numbers for the banks are not through but there is clearly plenty of unexpected news out there to come. I will separate the question above as they are related but different issues.
Firstly the concerns on the market relate mainly to the US and recessionary fears. The US going into recession is the main concern, and will the UK follow is another. The truth is the US is probably already in recession and that should come as no shock. Weak retail numbers at supermarkets, an increase in unemployment and a struggling housing market will probably show in a few months time that the US is indeed already there. On a positive note, the Fed reacted strongly and that should make its way slowly to the market to stabilise before the year end so as to ensure we don’t have a continued recession in 2009. The housing market is still an issue and it’s well known that rate drops take up to eighteen months to have their true impact on the economy, so we should keep a keen eye on that. The only risk is that the Fed’s keenness to avoid recession may see its way through to inflationary pressures later.
Considerable risk still remains in the banking sector, particularly through opacity. Whilst banks have injected large amounts of liquidity into the system, and this has reassured the market, we worry about what we can’t see.
Take the situation at Bradford and Bingley. The bank has just announced it has impairment charges of £226m of which £94 million were in relation to complex derivatives backed by sub prime mortgages in the US.1 Many were surprised they had such an exposure. It is precisely this lack of clear information that concerns investors and the market. News that it had a 42% increase in arrears and a trebling in charge to cover sour loans of £22.5m is transparent and whilst bad news, is easy to understand. For many the fact they have had such an exposure to complex structured investment vehicles and collaterised debt obligations in the US is too much opacity to handle. Their pre tax profit was cut by £121m and its share price plummeted by 23% to an all-time low of 187p. The concerns about the debt and opacity have then pushed other banks share prices down further.
So is it all over? Unfortunately not. The G7 finance ministers recently announced they believed the total losses from credit problems could reach $400bn but as yet we have only had $150 – 175bn written off by the banks.2 There is further bad news to come. Concerns over the mono line insurers being re rated in the US, forcing an inevitable sell off, leave the investor thinking they are better leaving that bar until the brawl finishes.
Banks will need to write off more capital and in turn more capital will have to be raised. This will take some time to make its way out of the crisis we are in. In the meantime lenders will continue to be as tight on their lending processes which will force even more pressure on demand in the housing market.
All of that aside, it’s clear that most of this has already been priced into the market for 2008 and also into 2009. In many individual stocks we have looked at, there is also a considerable mark down on the share price based on the overall bad news that exists in the market. Is it fair to mark all banking stocks down for example when not all have the same exposure to arrears, bad debt and US based collaterised debt obligations? This has left the equity market relatively fairly priced but also cheap in certain sectors leaving an opportunity for growth but expect further volatility.
If you have a financial query call Peter on 0800 0112825 or e-mail info@wwfp.net and take a look at our section on investment.
Sources
1 Guardian
2 Standard Life
The value of shares and investments can go down as well as up
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