The film may be about the oil industry but it is the banking and financial services area that really concerns me.
Recently most of the headlines around banking have been focused on the large international financial conglomerates, such as Citi, UBS, Barclays and Merrills. But as they are frankly the tallest towers, they are the most likely to attract more of the attention. In fact, it’s further down the financial pecking order where there are far greater worries, not just so much about repairing damaged balance sheets, but more seriously with questions about the viability of their business model and structure, and in some cases their actual existence.
Already we have seen a first wave of financial failures in the US amongst the smaller and weaker regional banks and finance houses, names that are not familiar to us directly but still operate in areas where we also have similar companies. We will not be immune and there will be blood even when Northern Rock is sorted out.
Last week’s figures from Bradford & Bingley (B & B) are a case in point, not so much in terms of the losses and provisions stated, but rather an uneasy feeling about such businesses that may be most exposed to a more sustained domestic economic slowdown. The subsequent, although unconnected, comments from Mervyn King at the presentation of the Bank of England Quarterly Inflation report, just served to underline this worry. B & B are significantly exposed to the “buy to let” market which is an area already suffering especially with those amateur landlords drawn in to the fashion fad of buying five flats “off plan” and then expecting to be able to fund the lending out of rent – get real guys – it doesn’t usually work.
Those that I have a regard for in this sector expect to see their profit coming from capital gain and not rental income. With the possibility of further weakness in house prices and low demand, this will put further pressure on borrowers and more to the point - their lenders. Smaller banks and certain more modest building societies who have not judged their funding and markets carefully will be having, at the very least, a difficult year – others may not have a future.
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It’s that time of year again when pavement and railway hoardings start to be covered in advertisements shouting the unmissable charms and opportunities for this year’s ISA season. Glorious percentage growth claims will be splashed across the posters, along with alluring discounts desperately trying to attract investing customers. This year though, many such equity funds may well find themselves having all the allure of ice cream on a wet weekend in February.
Some houses may even have been pulling their promotional programmes in the face of a wave of negative investor sentiment. Perhaps however, they should look where clients are still investing and the answer has been into those investments where a broader array of asset types have been deployed and the worst effects of the fall in values have been avoided.
Each year the industry seems to find a fashion fad, and in most cases such investment fads become an embarrassment within a year or so. Last year we saw UK commercial property providing a great example with huge hyping and sales offers, and we all know what subsequently occurred. Prior to that, many were attracted into commodity funds at their peak.
Maybe it could now be the turn of the emerging markets to lose their glorious attraction this year, but actually my fear relates to some of the cash, liquidity or near cash funds that are being offered.
It came to light last year that there were some notable examples of certain “liquidity” funds that in fact contained some astonishingly risky and quite illiquid holdings. Some rates seem too good to be true and some of the liquidity funds may turn out to be not quite as “cash like” as previously broadcast. Please take some care here as all may not be quite what they seem.
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And finally………..a report from the Ministry of Defence on UFO’s is always a cracking read. Apparently there were 135 reports to the MoD of the usual selection of erratic lights and odd flying shapes however, news from Wales included comments from a witness about seeing spaceships - following which “one of them abducted his dog, car and tent” whilst out camping last January.
It’s more likely the dog was fed up camping in January and drove off with the tent to get away from its stupid owner!
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited