While there has been no shortage of individual company specific controversies swirling around the market, and new survey data surrounding the macro-economic landscape has reinforced a consensual view that the world is slowing, it is perhaps surprising that domestic equity investors have seemingly ‘sat on their hands’ over the past couple of weeks.
The apparent failure of the world’s biggest security business, G4S, to deliver the necessary level of manned guarding for the imminent Olympic Games has probably been the biggest corporate ‘story’ this week. However, a fall in the support service company’s share price from 290 pence to 240 pence probably says more about the damage to its reputation (and ability to win new business, from the British Government and beyond) than any immediate financial ‘hit’- penalties are expected to be circa £50 million - attached to the specific UK Olympics’ contract. The market may have a legitimate concern about G4S’ board to manage a huge (657,000+ employees), disparate (extending beyond manned guarding) international empire , and doubts about its future corporate strategy (following last November’s aborted attempt to acquire the Danish cleaning services ISS Group, for £5.2 billion). Having said that, the decline in the company’s equity worth appears overdone, and could even prompt a prospective predator (which is more likely to be a corporate ‘break-up’ merchant, than a trade buyer) to take a closer look.
The banking industry is never far from capturing the headlines, albeit rarely in a positive way, and this week saw the spotlight turn from Barclays (and interbank lending rate fixing) to the world’s biggest bank HSBC - which has been accused by the US Senate of ignoring country-specific sanctions, and knowingly transmitting monies from criminal and terrorist organisations into respectable locations (a process known as ‘laundering’). Much of the evidence has been colourful, involving Mexican drug dealers and gun-runners through to Middle Eastern-based terrorists, and is likely to lead to HSBC being fined a sum in the region of US$1 billion. Banks are obliged, under agreed sanctions, to consider where both parties to any transfer of monies are located – notably in Burma, Cuba, Iran, Iraq, North Korea, Syria and Zimbabwe - and the nature or purpose of the monies before opening an account or handling any transaction. The illegal activity typically occurred between 2001 and 2007 (as was the fraudulent activity surrounding the manipulation of the LIBOR), and it seems unlikely that any main board director of HSBC will be forced to resign as a consequence. By contrast with G4S and its banking peer Barclays, the value of HSBC’s stock has barely suffered from these revelations – slipping back by just 3%, against a little changed wider market, to date.
The market fears that other banks will almost certainly be implicated in one or both of the current misdemeanours; something which is depressing sentiment towards the sector ahead of the half yearly trading updates. This lack of appetite for bank stocks is exacerbated by a belief that better opportunities to buy will emerge later when greater clarity arises on a number of short term issues. These include the senior management vacuum at Barclays, and an absence of progress surrounding Lloyds Banking Group and the Royal Bank of Scotland’s efforts to sell assets (notably a package of banking branches plus, in RBS’ case, its Direct Line insurance subsidiary). The banking industry appears unlikely to escape its regular bouts of admonishment, by both politicians and the media, in the foreseeable future – as evidence of better practice and corporate behaviour may have to cumulate for several years, before a sea change in public perception occurs. However, for the sake of the wider weak domestic economy – as much as the banking industry itself – the writer hopes that a less emotive perspective be taken of Britain’s once highly regarded financial institutions, which still play a critical role in creating wealth.
Investors appear more or less immune to further evidence – both of actual historic statistics or survey data – of a weakening global and local economic environment, if the market’s response to the quarterly survey published by the International Monetary Fund (IMF) this week is any guide. Perhaps because it only served to reinforce the intuitive expectations of the majority of investors, as the outlook for the world’s major developed economies and its leading emerging countries – according to the IMF – has deteriorated, in almost every instance, since its previous report in April. Forward-looking survey evidence tends to be more valuable, if obviously less accurate, than historic data (for example, the announcement on Wednesday that UK unemployment fell by 65,000 to 2.58 million in the three months to 31 May 2012, a rate of 8.1%, undoubtedly aided by Olympics-related job creation) as markets are more interested in what is likely to happen in the future, than that which occurred in the past. While independent survey data, as opposed to a single government’s, is preferred, certain pronouncements – such as from the likes of the IMF – carry greater weight, in part based on their track record of previous forecasts.
The IMF’s latest survey indicates that global GDP growth is set to be 3.5% this year and 3.9% in 2013, with this performance very largely being driven by the United States (the world’s biggest economy, by some measure, is set to grow by 2.0% in 2012 and by 2.3% next year), China (the fast growing, second-largest economy is forecast to expand by 8.0% and 8.5% in 2012 and 2013 respectively) and other emerging economies such as India (whose GDP is expected to increase by 6.1% and 6.5%, again in real terms, in 2012 and 2013). By contrast, the Euro zone (contracting by 0.3% this year, before gaining 0.7% in 2013) and the United Kingdom (up by just 0.2% in 2012, and 1.4% next year) are barely expected to make a positive contribution.
As one might expect, the IMF highlight Europe as being the most critical component to global economic health, and call for its politicians to take early decisive action to stabilise and reform the single currency bloc. The organisation also warn against any complacency in emerging economies (after many years of uninterrupted, supra-normal levels of growth, partly driven by a credit boom and overseas investment), as evidence of a slowdown – most notably in China – emerges. The IMF express concern about public finances in the US and the UK; in particular, a soft tax backdrop, which has stimulated economic activity, in the US is set to reverse in 2013. Insofar as domestic public finances are concerned, the organisation indicated that the deficit (tax receipts less public expenditure) could be £20 billion higher than the Chancellor of the Exchequer predicted in the March budget. Incidentally, the IMF’s growth projections for GDP in the UK differ very considerably from those produced by the Office for Budget Responsibility (OBR) in March; the OBR anticipating considerably higher GDP growth of 0.8% in 2012, and 2.0% in 2013.
As this blog first intimated, it may be somewhat surprising that the UK equity market has held up well over the past week or so. Clearly, investors must be focused on the apparent value on offer (inherent in a low earnings multiple, high well-covered dividends and discount to book values) and absence of an appealing alternative in a slowing inflationary environment. A close inspection of trading results – the likes of American-listed businesses, such as Alcan, Apple, Citigroup, Coca-Cola, Goldman Sachs, Google, JP Morgan, Mattel and Wells Fargo – suggests that earnings are at least matching analysts’ expectations. While smaller Momma/Poppa businesses may be struggling in the current climate, larger listed, often multinational, firms are expected to be performing reasonably well – despite little top-line revenue growth – as often re-engineered balance sheets, operational cost-cutting or other corporate efficiencies can be implemented to deliver mid single-digit profit and dividend growth, which underpins the worth of equity.
All domestic eyes will be on a number of leading FTSE100 constituents, that are due to announce trading updates in the next couple of weeks and provide some guidance to investors of their prospects going forward. Against a backdrop of greater accountability (per recent appearances before parliamentary committees or other courts) and focus on their remuneration packages, one can expect management to err on the side of caution, if not humility. Also, post trading results, directors come out of their compliance-imposed ‘closed period’ (which runs from the end of the period reported upon, to the date of announcement), and then become free to deal in their own company’s stock. It is always interesting to see board management invest, as well as noting (and trying to assess the rationale behind) disposals.
The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.
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