18 August 2016

Week in Brief: Business and the City

SMALL CHANGE; NO CHANGE:  The Swedish bank Handelsbanken has become over the last twenty years the wealthy private customer’s bank of choice, both in Scandinavia and in the UK, where it has gone from a modest number of offices in London and a couple of major cities to over 200 branches now.  When other banks struggled, its business model took it through the recession in pretty good shape.  As other private banks cut services, Handlesbanken improved them; when other banks centralised, the Swedish bank went back to an old fashioned model and empowered local managers.  But recently this looked all set to change – Frank Vang-Jenson, who was appointed chief executive in March 2015, started to reverse the model into a (in modern banking terms) conventional one, transferring power back to Stockholm.  The powerful branch managers and the shareholders did not like it – the managers seeing their much valued autonomy and responsibility slip away, and the shareholders seeing a steady decline in the share price (down 10% over Mr Vang-Jenson’s period of office by the end of July this year).  Now the board have decided they prefer the original model – and the profits it has produced with low loss provisions and good levels of customer satisfaction.  So Mr Vang-Jenson is out, fired by the bank’s chairman, Par Boman, who has replaced him as chief executive with Anders Bouvin, a Handelsbanken “lifer”, who recently has headed up the UK operation.  “This decision is purely related to the individual” said Mr Boman, reaffirming the bank’s delegated business model.

NO DEFENCE:  More departing chief executives – this time at Cobham, the major UK specialist aerospace and defence business, which has had several difficult years, and recently announced a loss of £38m for the first half of 2016.  This contrasted with a profit of £4m for the same period last year, but perhaps more sensitively, followed a major rights issue in April this year which raised £500m.  Analysts and commentators have repeatedly criticised a series of major acquisitions led by Bob Murphy, who was appointed chief executive in 2012 and immediately began a programme of diversification, most of which was not as successful as hoped and left the company with a large amount of debt.  Now the board have decided to act – they replaced their Finance Director in June this year and now Mr Murphy is also to go, to be replaced by David Lockwood, who at the moment has a similar job at Laird, a business operating in similar areas to Cobham.  He is unlikely to be able to take up his new job until late this year or early next, but his first task is to look very closely at the diversification strategy pursued by the departing Mr Murphy, and probably to prepare a sharp axe…

EVASIVE AVOIDANCE:  As we all learned at accountancy school; “avoidance is legal, evasion isn’t”.  But when it comes to modern tax structuring, HM Revenue and Customs have introduced a new variant – which is basically “It’s illegal if we say it is”.  Successive Chancellors in recent years have tried to get the tax yield up by closing loopholes in tax law and trying to avoid opening new ones – whilst at the same time trying to encourage investment into favoured sectors (non-carbon power generation, for instance).  But with the UK having a whole industry of brilliant brains trying to create new ways of avoiding paying tax, the cat and mouse game between advisors and tax gatherers is played for ever larger stakes.  To short circuit some of the detail of attacking highly complex tax mitigation structures, the tax man has looked increasingly at examining the spirit of the structures, and making schemes which don’t work very expensive indeed to those who seek to avoid paying the tax.  Now they upped the game a further step – the Treasury has announced that if new proposals are approved, those who advise on and devise such schemes will be fined amounts of up to the amount of the tax which would be avoided (evaded?) by the scheme, thus hitting the accountants and lawyers who are usually instrumental in structuring the tax transaction.  At the moment the impact of failed schemes does not hit those involved as advisors – who often do not even have to repay the fees charged to the client with the tax problem, unless the client has thought to negotiate that into the advisory contract.

EARLY WARNING OR WARMING?  We are all Brexiters now, according to the Prime Minister, but both Remainers and Leavers are eager to find evidence that they were right, at least in terms of economics.  Now, we are starting to see some post Referendum data, and perhaps the first really clear survey is that just published on UK job creation.   That seems to be one up for the Leavers – the number of those drawing benefits continued to decline, by 8,600 for the month of mid-June to mid-July.  But maybe not – job vacancies also fell – by 7,000 in the quarter to mid-July.  That might not sound too bad – job vacancies will of course fall if employment rises – but job vacancies continuing at a high level would show good under-lying growth in the economy.  The unemployment rate also fell very slightly – but that also is a quarterly statistic, so it is not clear what, if anything was post Referendum.  Nothing very clear for either side really – but if you reading this on the day of publication, Thursday, today sees the first really useful figure – that for retail sales data.

HOUSES BUILT ON ROCK:  Bovis, the UK housebuilder, reported good half year figures (to end June), slightly confounding the market who were anticipating weakness.  The company is benefitting from a bold rights issue in 2009, the proceeds of which it used to buy land in an advantageous market.  Those plots are still being built out  and Bovis managed to push up both numbers of houses sold (by 5%) and average sales prices (by a very impressive 14%).  Bovis concentrates mainly on building in the south east, but outside the M25, and that should continue to produce good sales levels and some price growth, though the company pointed to rising costs, especially in terms of site labour – skilled building workers are increasingly scarce.  In spite of this generally good news the share price fell, though reflecting market sentiment with housebuilders rather than any particular concern over Bovis

KEY MARKET INDICES:

(as at 16th August 2016; comments refer to changes on the week; $ is US$)

Interest Rates:

UK£ Base rate:0.25%, unchanged: 3 month 0.46%(rising);5 year 0.33%(rising).

Euro€: 1 mth-0.33% (rising); 3 mth-0.28% (steady); 5 year-0.30% (rising)

US$: 1 mth 0.49% (falling); 3 mth 0.73% (falling); 5 year 1.10% (falling)

Currency Exchanges:

£/Euro: 1.15, £ falling

£/$: 1.30, £steady

Euro/$: 1.13, € falling

Gold,oz: $1,339, slight rise

Aluminium, tonne: $1,644, steady

Copper, tonne:  $4,746, falling

Oil, Brent Crude barrel: $47.55, rising

Wheat, tonne: £131, rising

London Stock Exchange: FTSE 100: 6,941 (rising).  FTSE Allshare: 3,774 (rising)

Briefly: Interest rates continue to fluctuate within narrow bands, although there is now some downward pressure on the US$.  The FTSE100 is nearing the point at which it will break the 7,000 barrier; oil also moves up; and wheat continues to make gains – a bad harvest in Europe (although not in the UK) is driving that.

 

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