The real reason to avoid Standard Chartered

published 15 August 2012

Panic over. Standard Chartered has settled.

The Asia-focused bank had been accused by a New York regulator of hiding $250bn-worth of transactions with Iran.

The bank has agreed to pay $340m to New York state to settle the accusations. It'll also have to put up with much stricter supervision in New York.

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The bank won't be desperately happy about that, but it's far from being the worst-case scenario some analysts were worried about.

But I still wouldn't touch the shares with a ten-foot bargepole. Here's why.

Standard Chartered is too expensive

This isn't the end for Standard Chartered's Iran woes. There are ongoing investigations being conducted by other US authorities, including the US Treasury, the Department of Justice, and the Federal Reserve, reports the FT. These will be settled separately.

But investors were already aware of those investigations. The big surprise the vociferous attack on the bank from the New York regulator has now been dealt with.

The share price is still below the £15.67 level they reached before the scandal kicked off. So why not buy?

The simple fact is that Standard Chartered is too expensive. My colleague Phil Oakley looks at the stock in more detail in the next issue of MoneyWeek magazine, out on Friday. (If you're not already a subscriber, subscribe to MoneyWeek magazine.)

But if you want a quick and dirty guide that tells you the bank is too expensive, just look at the market reaction to the original allegations.

When a FTSE 100 stock sells off by as much as 30% in a day (at its intra-day low on 7 August, the share price fell below £11), that's a big deal.

Yes, the attack was unexpected, and vitriolic. Being labelled a 'rogue' anything by the US authorities is often a precursor to a full-blown frontal assault. And it's understandable that investors in the banking sector are jittery. After all, it's just one scandal after another at the moment.

But the sheer extent of the fall also suggests that Standard Chartered was priced for perfection. And that bothers me. Everyone loves Standard Chartered because it's an Asia-focused' bank. Roughly 90% of profit and revenues come from Asia, Africa and the Middle East. So it's far away from all the economic carnage in the developed markets.

But Asia is set to slow down as well. And while we now have a very good idea of just how bad things are in the UK, the US and Europe, we have no idea yet how bad they could get over there.

Australia's banks are worth more than Europe's

If you need more convincing, try this.

Cullen Roche posted a fascinating chart on his Pragmatic Capitalist blog a couple of days ago. According to Bank of America, by market capitalisation, the Australian financial sector is now larger than the eurozone financial sector.

Just to put that into perspective, the eurozone includes Germany, France, and Italy, three of the world's top ten biggest economies. The German economy alone is more than two times as large as Australia's. The eurozone population is roughly 332m, compared to Australia's 23m.

As Roche puts it: "Now that has to make you go hmmmm'."

Regardless of how bad things get, should Australia's financial stocks (remember this is a country with a rampant housing bubble we're talking about here) really be worth more than every one of their eurozone counterparts combined?

My point is not that European equities are cheap (although they are you must read our story on this from last week).

My point is that the Asian exposure' trade remains overcooked, despite clear signs that China is in trouble. Fund managers are still tipping luxury stocks and Western firms "selling into emerging markets" because they can't think of much else to say.

That means that once it becomes clear that things are going wrong, those stocks still have a long way to fall. So the last thing I want to buy now is an expensive Asian bank.

What if you bought at the bottom?

By the way, if you happened to buy Standard Chartered as it reached its lows, then congratulations. You took a calculated gamble, and it paid off. But remember to take the money off the table when the share price hits your target level.

And if you didn't set a target price, then I'd suggest you take your profits off the table now. Because if you didn't set a target price before you bought, you clearly didn't think the trade through. You bought the stock as a gut instinct punt, because you thought it would bounce and now it has. Mission accomplished.

Don't try to justify it in retrospect by setting a target now. Enjoy your winnings, and make a proper trading plan next time. You can learn more about trading tactics via our free email on spread betting, MoneyWeek Trader.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.