It’s been a tough week for Britain’s banks.
Both HSBC and RBS have announced massive job cuts. And the Co-op Bank is still feeling the fall-out of last Friday’s downgrade by ratings agency Moody’s.
The Moody’s downgrade was of particular interest to my colleague Bengt Saelensminde. Last year, he recommended buying the bank’s bonds. On Monday, he updated readers on his views.
On the face of it, the downgrade seems like very bad news, admits Bengt. It knocked around a third off the value of all Co-op bonds. Some are even speculating that the bank will need a bail-out.
But investors shouldn’t be worried, thinks Bengt. What seems like disaster is in fact potentially a great opportunity.
Let’s get one thing straight first. Bengt doesn’t disagree with Moody’s. In fact, he thinks the agency’s report is spot on. But “correct as it may be, this report is totally irrelevant”.
Why? Well, says Bengt, “what [Moody’s] is saying is that the bank is likely to need some new capital in order to comply with regulatory demands.” That’s probably true. “But so bloody what?”
After all, Co-op Bank is owned by the much larger Co-op Group, which has “a bucket-load of capital”.
Moreover there are signs that directors have been trying to fix things at the banking group, says Bengt. For a start, the life insurance side of the business is being sold and the general insurance arm is up for sale too. “Together, these two sales should bring in enough money to keep the regulators happy.”
There are definitely risks, says Bengt – make no mistake about it. But given how far the bonds have fallen, he firmly believes they are now trading at very attractive levels.
Make money from ‘Big Data’
Over at the Penny Sleuth, Tom Bulford has been getting very excited about ‘big data’. With the internet now almost everywhere, society is gathering an ever bigger heap of digital information, says Tom. The firms that can process this data, and find the useful bits. stand to make a lot of money.
“According to IBM, we create 2.5 quintillion bytes of data every day”, says Tom. “This means that 90% of the data in the world today has been created in the last two years alone.
“Where does it all come from? The constant use of the internet generates data all the time. Every time you use your mobile phone, you create data.
“But human interaction is not the only cause. There is the ‘internet of things’.”
What’s that? Well, as technology advances, everything from fridges to cars have increasing amounts of computer power, says Tom, which generates lots of data.
Of course the questions most readers will be asking is, “where’s the investment angle?”
Two of the biggest users of data are financial trading firms and medical researchers, says Tom.
“Many hedge funds rely upon high-powered computers to spot tiny price anomalies. By acting instantly, they can take advantage of these discrepancies to turn a profit. Proximity to a data centre is famously important. Even the few milliseconds that it takes for data to pass down a cable can mean the difference between profit and loss.
“Medical research similarly depends upon data like never before. Dramatic improvements in sequencing machines have made it possible to read DNA rapidly and cheaply. All over the world researchers are searching through vast quantities of DNA to look for links to diseases.”
Instead of investing directly in medical data research, an alternative option is to invest in data storage, says Tom.
“The data must be stored somewhere and according to the International Data Corporation, ‘storage is increasing at a compound annual growth rate of 53%… revenue from storage consumed by Big Data & Analytics environments will increase from $379.9m in 2011 to nearly $6bn in 2016.’”
But big data is not the only investment opportunity Tom is excited about. In fact, there’s another area he thinks could be far more profitable. Tom – not given to hyperbole – has even called this “the best investment for the next half century”. Interested? Click here and Tom will tell you all about it.
Is it time to dump equities?
Tom might be feeling optimistic, but Merryn Somerset Webb was in a much more bearish frame of mind when she took to her blog on Monday.
While we like high-quality stocks, says Merryn, we’ve also been aware for a while now that they are expensive. “Thanks to the generally weak fundamentals across the board, the pool of higher quality assets has become more limited in the last few years. And if you try and screen the remaining ones by some kind of valuation filter, not much comes up.”
Research from one of our favourite analysts, Andrew Lapthorne at Société Générale, confirms the extent of the problem. He found that the numbers of high-quality, fairly valued companies that yield at least 4% in dividends are at historically low levels.
That presents investors with some difficult choices, says Merryn. “When quality stocks are expensive in this way, their absolute returns over the next 12 months tend to be weaker than those of other types of stock. That suggests you shouldn’t hold them.
“But this is only the case if the market holds up. If it ‘corrects’, the higher quality assets are likely to produce the “best one-year relative performance as weaker and lower quality assets fall further. That suggests you should only hold them if you think the market is going to fall, but you aren’t sure enough to get out of the market all together.”
So the million-dollar question is, will the market fall? Lapthorne suggests it might. “Historically, a lack of quality income opportunities has been a bad omen for future equity market returns.”
All in all, says Merryn, Lapthorne’s research “doesn’t make you want to hold many equities at all”.
Readers soon began weighing in with their own views on the market. ‘Clive’ feels that money printing may have a powerful influence. “The question is whether those historical occasions coincided with massive QE (money printing). I somewhat doubt it. Maybe the outcome will be the same, but at some levels we might say “this time it is slightly different””
Meanwhile ‘Impromptu’ broadly concurred with Merryn. “I agree that equities are looking pretty squeaky nowadays, so am positioned defensively for income. I’m certainly finding it very hard to justify adding right now, so letting the cash build up (currently around 15%).”
It’s an interesting debate so, click here to have your say.
A financial storm is coming
Another MoneyWeek colleague who is feeling bearish is Tim Price. In fact, Tim’s cynical view of the current UK economy makes Merryn look like a raving optimist. Put simply Tim thinks the situation facing Britain is far more dangerous than anyone realises and he thinks a financial disaster is about to hit most UK investors. You can find out why he’s so gloomy here.
I should warn you that it’s not easy reading but at least he has some tips on how you can shelter your wealth from the coming storm.
Profit from the Canadian house-price crash
Finally before I go, I’d like to point you in the direction of one of my favourite articles this week. On Thursday Matthew Partridge explained why he thinks the Canadian housing market is set for a fall.
Canadian property isn’t an investment that too many of our readers would hold but Matthew’s found a way that we can all benefit. I’ll let him explain.
“Anyone with any kind of objectivity can see there’s a problem there”, says Matthew. “House prices have risen by 123% since January 2000. Even at the peak, US prices were only 90% higher than they were in 2000 – and in real terms, US prices are now slightly lower than they were back then.
“According to the Royal Bank of Canada, the average bungalow goes for roughly six times household income. This rises to seven times household income for two-storey houses. According to the Halifax, the comparable ratio for London houses is only 5.6 times earnings – and that’s high by historic standards.”
So Canadian prices are in a bubble, says Matthew. And now the bubble might be popping.
“The first sign of an impending crash is falling sales. In Toronto, sales are down 40% compared with a year ago. That’s led the property pundits to start talking of a “soft landing.
“But this phantom ‘soft landing’ goes against all past experiences of housing crashes. Like most investment markets, property prices are driven partly by momentum. In the boom times, rising prices feed off themselves, as people rush in, hoping they can sell the house later for a profit. The same thing happens when prices fall. People rush for the exits all at once, and prices often end up under-shooting ‘fair value’ rather than simply plateauing.”
So how can British investors profit? Well a housing crash would leave the Canadian government will be facing a huge bill for bad mortgages. The housing crisis would also impact consumer spending. That would likely lead to low interest rates or money printing, which would hit the Canadian dollar hard.
Matthew has the details on how to play a fall in the Canadian dollar so make sure you read the piece in full.
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Have a great weekend!