Banking Sector Shares
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Trading Features / Strategies from Simon Denham of Capital Spreads.
The banking sector, which has been pretty hard hit anyway, took a triple whammy this week:
- UBS reported almost unbelievable sub prime/credit losses
- Bradford and Bingley reminded us that there are other parts to banking portfolios that are at risk
- The Germans revealed their own efforts to avoid a financial meltdown in the smaller bank sector
Share prices and yields look almost ridiculously cheap at current levels with Stock such as Bradford & Bingley giving over 10% and both Barclays and RBS around 7%. For companies that are likely to be around for a very long time, these look (when compared to even their own issued paper let alone UK Gilts) to be very tempting indeed. Punters have been hovering up stock as well as hoping for some bounce back from the recent lows but the continued flow of bad news has seen set back after set back.
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The problem for the big investors is not the value as expressed today but the value in a few years time. With shell-shocked balance sheets, massive capital injections (at considerable cost) and virtually no chance of big takeover or merger stories (except in extremis) bank sector analysts are worrying about future growth potential. Share prices reflect not so much the value of a company today but the probability of growth tomorrow. A company showing 20pc long term growth history will trade on a much better multiple than one showing 5 or 10pc. So how do you value a sector that is in danger of giving negative numbers for the foreseeable future and may very well have further shocks from, as yet, unforeseen quarters?
As with so much these days this whole question will revolve around your expectations for the state of the global economy. If, like many, you believe in world wide economic weakness then, even at current prices, the banks may very well be poor value but if you are more optimistic and believe that the Non Western portion of the global environment will pull us out of the fire then a small dabble may well pay off in the long term.
In all investing actions there is calculation and risk. At some point the possible gains will outweigh the probable risks and it is the shifting sands of this equation on which the efforts of those hugely powerful ‘black boxes’, churning away in the dark corners of Morgan Stanley and Goldman Sachs, will be focused. One of the ways that we, as mere mortals, can attempt to catch any wave is to watch the trading volumes and await the time when a reasonable increase in these equates with a stable or rising market.
In the meantime the advice remains the same, sit back and keep your arsenal powder dry.
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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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
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.
'Banking Sector Shares' edited by SD, updated 15-Feb-08
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