Weak Banks and a Poorer UK
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Trading Features / Strategies from Simon Denham of Capital Spreads.
The continued weakness in the pound is also not having the expected effect. A huge preponderance of FTSE 100 business is actually non UK centric and as such profitability (in Sterling terms) should be reasonably well enhanced. If the pound remains at these lowly levels many quoted companies may well surprise to the upside on their numbers.
I am not a great believer in the power of a weak pound to benefit the UK economy. Only 13% of the UK business is now involved in manufacturing and a even smaller percentage involved in actually ‘exporting’ manufacturing. The fall of the pound will impact all 100% of the population but will economically only benefit a small fraction. In effect British asset values have fallen some 40% in world terms in just one year. This makes us all very much poorer than we were at Christmas time 2007 (it is just that we have not noticed it yet). The vast majority of the Durable and Semi Durable goods purchased from the various retailers are sourced from abroad, either we will have to buy considerably less or (which going by past experience is the most likely) the country will slip further and further into debt.
The best hope is that the pound remains weak and foreign manufacturers decide that it is cheap enough to set up here but, in truth, it would need a shift of seismic proportions to make the UK a favoured destination in comparison to China, India, Vietnam etc (and even these countries are suffering at the moment anyway).
We cannot discount a reasonable rally in the first few weeks of 2009 as the general valuations appear very fair at current levels.
Unfortunately the major problems remain though. Banks continue to struggle to improve their capitalisation. If land and property values continue to fall, if marginal (generally heavily indebted to the banks) companies continue to fail and if unemployment continues to rise then the poor performing debt books are likely to get considerably larger.
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Banks may yet have to dip into the public purse once more and this will dilute share holders almost out of existence.
The huge interest rate level enforced by the State (12%) is not only unjustified it is also self defeating. Slagging off bankers for asking for good returns on their money (maybe a few percent over Libor) whilst at the same time doing far worse yourself is hypocrisy of biblical proportions.
Not only this, it also lays down a sort of benchmark. Now nobody will recapitalise the banks on anything less than the terms set down by the Treasury. This forces the banks to concentrate on reducing their state liabilities rather than using excess capital to increase lending.
Without a strong banking sector everything else will struggle in the long term. We will simply be more exposed to whatever else the world economy throws at us in 2009 than many of our competitors.
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.
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'Weak Banks and a Poorer UK' edited by DB, updated 31-Dec-08
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