02 March 2017
Week In Brief: BUSINESS AND THE CITY
STOCK NOT EXCHANGED: It seemed the perfect match, but, before they even got up the aisle, trouble began – and now it looks as though it’s all off. And probably to widespread relief. The merger between the London Stock Exchange and its Frankfurt equivalent and rival, the Deutsche Borse, intended to create a world super exchange, seems to have collapsed, more or less at the last minute. European competition regulators were said to be imposing additional late conditions, including that LSE should sell off its controlling stake in MTS, which is an Italian based minority owned business that sells governmental bonds for and to European governments. LSE/DB had already being asked and agreed to sell the French arm of LCH Clearnet which is a similar selling agency, but the latest request was considered unacceptable because its Board saw it as a core part of the Exchange’s business. The Italian financial authorities are also opposed to such a sale, it is said, because it will weaken trading business in Italy and undermine Italy’s broader activities in stock and bond trading. The latest manoeuvre is said to be at the request of the French financial authorities to the competition regulator in Brussels, and is seen as national politicking in the deal to strengthen France’s position in European trading markets.
The deal has not completely gone away yet, as the managements of the two marrying exchanges have appealed against the requirement to sell MTS, but it is thought unlikely that this will be overturned. And some commentators felt in any case that the merger was unlikely to happen, or at least unwise, once Britain voted to leave the EU in June last year, or until after the terms of that divorce had been agreed. That is also believed to be the preference of the British government, though generally ministers are keeping well clear of the subject at the moment. There is opposition in Germany to the merger – especially the requirement that the head office of the merged business will be in the UK, even though DB will have majority control of the super exchange.
PROGRESSING BANKERS: The reconstruction of the Barclays Bank platform under not-so-new chief executive Jes Staley continues well. Mr Staley has gone in a different direction to his predecessor Antony Jenkins, who wanted out of investment banking and into lower risk and retail operations. Mr Staley is heading back into investment banking which he believes can present manageable risk if the right people are in place, correctly motivated and rewarded, and is potentially much more profitable in a very competitive world where adding value in retail (or at least charging for it) is increasingly difficult. It is early days yet, but the results are slowly moving in the right direction – last year saw return on equity improve from 5.4% to 6.1% – not brilliant but 10% up. The core measure of the bank’s capital robustness, tier one capital, increased to over 12% but represents money tied up in low returns, so progress on both fronts is good news. The outlook for investment banking is also suddenly brighter, with opportunities created by the Brexit vote and Mr Trump’s election in the United States. One policy that Mr Staley is continuing is disengagement from the less core parts of Barclays’ international empire, the latest bit likely to go being Barclays’ half ownership of its South African business. That will help further boost the capital position, as will the board’s halving of the dividend on its ordinary shares. In return the bank is changing the way it accounts for bonuses – an esoteric subject in accounting terms but one where the bank is taking a more conservative approach by accounting for the costs when it awards the bonuses, rather than when it pays them (many are deferred, awaiting results before they are paid). The bank is building up capital quite rapidly which should enable it to look at taking on business expansion soon – except for one distant black cloud – the battle with the US regulators over alleged mis-selling in the USA market. Most of Barclays’ rivals have settled out of court – at enormous expense – but Staley thinks proposals made to Barclays have been unfair, so he is preparing for a court battle. That could be a protracted battle and an expensive one, so building up reserves is certainly the prudent thing to do.
RISING STAR: Derwent is a very long established quoted company. It originally owned a private railway and warehousing near York- but for many years has been run by John Burns and Simon Silver, who have turned it from a moribund shell into one of the most active, and highly regarded, office developers in London. The secret of its success, born in necessity, was finding buildings and sites close to, but not in, prime office locations, where it could build cheap and cheerful developments and let them to tenants who were cost conscious and did not want to pay prime rents. They had a particular knack of spotting locations that were beginning to gentrify, so they were able to buy raw material cheaply, and then hold as rents and yields improved while the smart set poured in. Soho was an early favourite, then south Islington, and such East End spots as Spitalfields and Whitechapel. As Derwent has grown, so has the scale of its developments, so that it can improve perceptions of locations simply by having a presence there. All this has put it into the FTSE 250 and the results this week show continuing progress – rental values up 5% to a total rent roll of £31m, vacancy rates exceptionally low at 2.6%. The only bad news is that capital values fell just over 1.3% last year, reflecting a slightly weakening office market in London, but Derwent are still confident about its locations, with new developments in Whitechapel and Paddington; it underwrote that confidence by not just increasing the regular dividend by 25%, but also a special dividend of 52p per share to reflect the £225m of capital sales made in 2016.
OIL ADVICE: A pointer to likely future trends in oil production – BP says that while at the moment it needs the oil price to be around US$55-60 a barrel to make money, it expects that to drop to under $40 by 2021 as new contracted supplies come on stream, and current capital expenditure reduces as the exploration phase produces results.
SLOW TRAIN FOR GO-AHEAD: Go-Ahead Group may be regretting choosing that name, at least as far as its railway activities are concerned. Whilst its bus division is performing well, the railway business, mainly commuter services south and north of London (including Thameslink, which connects the two), has suffered from the on-going industrial action on Southern relating to closing train doors, but at a deeper level from issues relating to the manning of trains and staff responsibilities. Latest results, for the second half of 2016, show a fall in group profits of 12%, to £67m, all of that being due to the problems on Southern, with a loss there of £5m, and passenger numbers down over 3%.
KEY MARKET INDICES: (as at 28th February 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.35% (slight fall); 5 year 0.67% (falling).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year -0.04% (falling)
US$: 1 mth 0.78% (slight rise); 3 mth 1.05% (steady); 5 year 1.95% (fall)
Currency Exchanges:
£/Euro: 1.18, £ slight rise
£/$: 1.24, £ steady
Euro/$: 1.06, € steady
Gold, oz: $1,252, rising
Aluminium, tonne: $1,907, rising
Copper, tonne: $5,926, slight fall
Oil, Brent Crude barrel: $555.25, falling
Wheat, tonne: £144, falling
London Stock Exchange: FTSE 100: 7,263 (slight fall). FTSE Allshare: 3,953 (slight fall)
Briefly: A very steady week with some recent gains being modestly given up, but all reported commodities moving in recently established ranges. Perhaps the one to watch is gold, slowly moving up; not Euro long term rates, where our prediction that they might be back in positive territory was proven wrong within a week!
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