Bank Stocks and House Prices
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Bank Stocks and House Prices

Bank Stocks and House Prices


Trading Features / Strategies from Simon Denham of Capital Spreads.

As the world and his dog fulminates about the potential for growth / recession / depression (take a card, any card) the actual markets appear to be doing their best to pull us out of the malaise that has afflicted investors since the turn of the year. It now appears that the banks merely had to stand up and admit “we are knee deep in manure and sinking” for analysts to start saying “well that’s ok then”.

It would be wise at this point to mention that admission of problems is not the same thing as finding their solution. After RBS have taken ten, or is it eleven or twelve (??), billion pounds out of investors’ pockets and Barclays, Alliance & Leicester and Bradford and Bingley and taken another eight or nine what then happens? This would not be too worrying if the situation were not a world-wide phenomenon. It is not just UK banks in need of capital injections. From Germany, Switzerland and Spain to Japan and the US, the major financial institutions are all being squeezed.

Liquidity injections can only do so much. Treasury operations are going to find their remit severely restricted in future years and there is always the worry that the regulators will also place a badly directed boot in the groin (in general, politically inspired constraints have the opposite effect to that intended). Without those sharp young men building ever more complex financial models the availability of capital will be severely constrained, all the way down to a bog standard Mortgage offer to Joe Blogs in Huddersfield.


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Bank stocks have had their knee jerk reaction (in the UK) to the events of last week as their overall stability becomes more assured. However for the big investors the story will now become ‘what of future growth?’ With less money coming from the various Treasury Units within the banks, Mortgage approvals severely cut back and corporate loans at ever wider spreads to the Base Rate the potential for growth over the next few years does not exactly fill you with excitement. And that does not even include the fear that something else may go wrong. The UK is living well beyond its means and with such a huge Budget and Trade deficit it is probably amongst the worst protected against a global slowdown. The currency performance is telling us a lot more about sentiment towards Britain than the FTSE 100 is. Foreigners are staying away. Unless there is extreme value to be had investors are quietly dumping Sterling for ‘safer’ shores. We should really have seen the writing on the wall when it was reported about a year ago that central banks were moving more of their reserves into Sterling. When do central banks ever get it right?

The next banking brick to drop remains the prospects in the property markets. Whilst I do not actually envisage a house-price fallout we may get into the equivalent situation but ‘in reverse’.

The likelihood is for inflation to rise to around 4% (RPI) before slowly drifting back towards the 2% mark over the next few years. If housing has no price appreciation and, perhaps, a modest 5-10% fall over the period it is quite easy to foresee a ‘valuation’ depreciation of 15-20% without anyone really noticing. If this is the scenario that pans out the area that will take the pain is most likely to be the retail arena as re-mortgages become less available and the corresponding boost to consumer spending fails to materialise. And, of course, there is always the chance that if employment starts to suffer housing could well go into reverse.



The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.


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Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'Bank Stocks and House Prices' edited by SD, updated 21-Apr-08



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