11 February 2016
Week In Brief: BUSINESS AND THE CITY
BANKING ON GLOOM: Last week saw further turmoil in the FTSE 100; the index which encompasses the 100 largest companies on the London Stock Exchange. This part of the market has seen wildly fluctuating fortunes over the last few months, with swings of up to 17% of the index. On Monday it fell by about 10%, to a low not seen since mid 2012. Previous recent weaknesses have been attributed to poor performances by mining and commodities stocks – the major oil companies especially as they have suffered falling share prices as oil has continued its price slide, down at one stage to US$26 a barrel. On the mining side, the prices of many metals has weakened as Far Eastern economies have stumbled; the share prices of mining giants have dropped with their product. We have touched here before on the struggles of Glencore, the copper (and other metals) giant which has the additional problem of a debt overload.
But oil prices have begun to creep up again and metal prices have also stabilised – Glencore took the bold step of closing some of its copper mines to try to restrict supply and force prices up, a step which seems to have paid off as the price of copper has steadied.
So what is the problem in the market now? It’s our favourite villains, the banks. There is a mixture of fears – from the nightmare scenario that we are in early 2008 all over again, right to the impact of negative interest rates in the Euro and the yen – and even sterling LIBOR rates are on the slide. And then there is the further alarming jolt delivered by the problems of Deutsche Bank – which you may still think of as Bankers Trust – not just a huge German high street bank but a major international investment bank. Deutsche has had a very bad time in its investment banking division, reporting heavy losses, sufficient to lead it to cancel staff bonuses and suffer a slide in the share price which continues. Royal Bank of Scotland and HSBC are also said to be underperforming and their share prices have followed suit, setting off weaknesses across the whole sector. Whilst we seem unlikely to be replaying 2008 – the banks are prudently lent and well capitalised – there is no doubt that they are struggling to make money, with little demand for credit and the complexities of managing negative deposit rates.
FOUR CARD SUIT: Four views of the UK housing market:
Firstly, the slowdown in the London premium housing market is hurting the Treasury. Income from this source, derived from the so-called stamp duty levied on sales, is running well below forecasts – down by £620 million in the first nine months of last year. Over £100m of that decline is from the central London market, where big increases in the rate of charge have slowed the market by as much as 40%, according to some estate agents. But the rest of the country is also contributing much less than expected – people are moving less often, not just because of stamp duty, but also because of tight new rules on mortgage lending. And low interest rates may well mean that people who have to move for work, for instance, will rent a place, and let out their former residence rather than sell.
Meanwhile; Stephen Ross, an American property billionaire, has bought half of the specialist UK developer, Pocket Living, which builds micro homes aimed at first time buyers who can only afford the most economical of homes. Pocket has worked closely with central and local government in London to increase the supply of housing to the market, and has now sufficient experience to want to start to expand its activities much faster, both in London and the south eastern and into European cities. It is hoping to get its turnover up to 500 homes within three years.
And Also: Redrow, the northern house builder, founded and chaired by Steve Morgan, which had moved into central London high end apartment development, announced that it is to accelerate its move to what it believes to be a safer and more remunerative market – it has for a couple of years now been concentrating on London suburbs and south-eastern commuter towns, in addition to its traditional northern estates. That is helping a very strong profit performance -gross margins are up to an impressive 18% and dividends for the current year should be 67% up on last year. Its land bank is up 20%, including a site for 2,900 homes in Colindale in northwest London.
But Then Again: Berkeley Group, the upmarket London and south east developer which builds large luxury houses under the Berkeley name, and high rise apartments under the St George’s and other banners, is under attack by a group of hedge funds who are shorting the shares. Berkeley has been run by Tony Pidgley since it was founded in 1976. He is regarded as one of the shrewdest and canniest operators in the market, so a bear attack on Berkeley shares is a bold move indeed. But Berkeley has a big exposure to overseas buyers of its luxury homes, especially those tower blocks, and it is an open secret that sales volumes are falling fast, and prices too. The issue for those shorting the shares is how much profit erosion Berkeley can take on those units, and how that is compensated for in sales of big houses in the Home Counties to professionals moving out of London. Sales were up 25% last year and the company said recently it was very confident in its business model. Certainly, in his forty years running the business through many cycles, Pidgley has never got it wrong yet.
BANK TO STAY PUT?: HSBC has been agonising in public for some time as to where it should locate its physical and legal headquarters. After a hundred and thirty years in Hong Kong, the unknowns of the lease expiry and reversion to China drove it to the UK. But it has not felt entirely comfortable here, in spite of buying Midland Bank in the early 1990’s. Increased UK regulation and its feeling that the real growth for the foreseeable future would be in the Far East led to a debate with shareholders and senior management which looked as though it would result in a move back east, though maybe to Singapore rather than Hong Kong. Now it looks as though the result of the debate, aided by kindly words from the Bank of England and the Chancellor, may be to stay put, but with some well heralded investment into Hong Kong and also into Shanghai to demonstrate its commitment to the region. Stuart Gulliver, the bank’s chief executive, who was firmly in the “go East” camp, is rumoured now to think that the right thing to do is stay west – because it enables the bank to continue to be funded under a western model which keeps investors happy and funding costs low.
BACKBONE OF STEEL: At least one British steelmaker seems to be safe, at least for the time being. Sheffield Forgemasters, which is one of the most highly skilled specialist steel makers in the UK, makes parts for complex machines such as nuclear reactors, drilling and boring devices, and large engines. Now it has procured support by way of some low interest loans backed by three major customers, BAE Systems, Babcock, and Rolls-Royce Group. What they have in common is major contracts with the Ministry of Defence, especially the forthcoming Trident submarines. The MoD brokered a deal whereby American bank Wells Fargo put up a £30m loan to Forgemasters, which the three engineering firms have guaranteed. That seems to have given Forgemasters safe funding until the end of next year.
KEY MARKET INDICES: (at 9th February 2016; comments refer to changes on one week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (unchanged); 5 year 0.83% (falling).
Euro€: 1 mth -0.17% (rising); 3 mth-0.11% (steady); 5 year -0.06% (falling)
US$: 1 mth 0.60% (steady); 3 mth 0.70% (steady); 5 year 1.13% (falling)
Currency Exchanges:
£/Euro: 1.29, £ falling
£/$: 1.44, £ steady
Euro/$: 1.12, € rising
Gold, oz: $1,164, slight rise
Aluminium, tonne: $1,495, slight fall
Copper, tonne: $4,572, slight rise
Oil, Brent Crude barrel: $31.90, slight fall
Wheat, tonne: £105, slight fall
London Stock Exchange: FTSE 100: 5,689 (steep fall). FTSE Allshare: 3,127 (slight fall)
Briefly: We comment above on the weakness of the FTSE100. There is a clear divergence between the FTSE100 and other indices, especially the Allshare, which weakened, but not nearly to the same extent. Otherwise a steady week, though five year sterling interest rates finally broke the 1% floor and seem to be continuing down.
