Being unpopular can make life easier for companies – just ask BP and HSBC
When you're as hated as banking and the oil sector, it doesn't take much to pull off a nice surprise. John Stepek explains what that means for investors.
This morning, companies in two of the most hated sectors in the market released their results.
There are benefits to being hated. Not many, I’ll grant you.
But one of them is that you don’t have to do much to surprise people on the upside.
And that’s exactly what the banking and oil sectors have done today...
The banks benefit from everybody hating them
Let’s start with the banks.
The nice thing about being widely hated as a sector, and incapable of doing right, is that it means you can be pretty aggressive about forecasting bad news without it necessarily devastating your share price or your reputation.
When you’re in the gutter already, there’s only so much further down to sink. (Yes, I know some smarty pants out there is pointing out that zero is still a lot further down than gutter levels, but I don’t think any of the banks are actually going to go bust.)
During the last quarter, most banks reported that they’d be putting aside big provisions for bad debts due to Covid-19.
Now it seems that things aren’t going to be quite as awful as they’d expected. This morning, HSBC reported far lower bad debt provisions than analysts had been expecting, which in turn meant that quarterly net profit was a good deal higher than expected.
Ewen Stevenson, the group’s chief financial officer, told the FT that “we have seen a real stabilisation of the economic view… the tail risks around [coronavirus] have diminished”. Meanwhile, CEO Noel Quinn said “there is strong evidence of a ‘V-shaped’ recovery in Asia”.
The bank is even considering reinstating its dividend. Unsurprisingly, the share price rose strongly this morning.
It was a similar story over at Santander. The Spanish bank said that its customers have taken less of a hit than expected. Those who took repayment holidays have returned to making payments more quickly than forecast. As a result, it expects full-year loan losses to be less drastic than expected.
This is all good news. The obvious issue, of course, is the question of what impact the ongoing pandemic will have. Yet, so far it’s clear that however badly governments have handled other aspects of the crisis, the generalised financial support that’s been forthcoming appears to have offset the worst-case scenarios.
Can we assume that it will continue to do so? That’s a dangerous assumption, although on balance I think the odds are in favour.
Life has to go on. Outside of the very hardest hit sectors, companies are picking themselves up and getting on with things. It's clear that if governments throw spanners in the works again with heavy-handed lockdowns, then compensation needs to be forthcoming (we’ve seen that here already).
So, on balance, the banks are probably right to be more upbeat on the future.
Another point I’d make. Banks are only able to be very gloomy on the outlook for non-performing loans (ie, bad debt) when they are secure in the state of their balance sheets.
If you’re interested in investing in the sector, I’d look out for the banks that have been happy to look at worst-case scenarios head on. I’d be more circumspect about the ones that might be trying to put a brave face on things – that suggests they aren’t really in a position to taking a hit on bad debt.
Oil companies might turn into nice little earners
So, what about oil, which is, if anything, even more detested?
Well, today BP came out and reported a third-quarter profit. That was better than the small loss that analysts had expected.
The company wasn’t exactly upbeat. The shares made a bit of a nudge higher, but that hasn’t stopped them from still being more than 10% lower than their crash low on 23 March. (That’s quite something given the rebound in markets generally since then.)
BP benefited mostly from not having to write off the value of its exploration assets this time around. That’s because it already did it. So, yes, that’s not exactly hyper-bullish either.
But what can we say? Let’s assume – which may or may not be reasonable – that the oil price is now just about at its lowest ebb. It might not go up a lot but it probably won’t go down a lot from here.
Let’s also assume that BP doesn’t completely ruin itself in the race to go green. That might be a possibility in the future, but right now, keeping an eye on the pennies is a priority, which suggests that it won’t make any wildly unwise investments in “blue sky” green projects.
What does that leave you with? A company that’s sitting on a decent chunk of reserves of a commodity that’s still vital to the smooth running of the global economy. A company that also isn’t spending anything on the expensive process of finding that commodity.
In the medium-term, you’re looking at a company that will probably churn out a decent amount of cash for a decent number of years. There’s also a side bet on the potential for higher oil prices than might currently be expected. And an outside bet (though I wouldn’t back this one) on a highly successful transformation into an alternative energy company.
Given the current price, that doesn’t seem like an awful thing to have exposure to.
If you think oil and banks aren’t as bad a bet as the market seems to believe, then the reality is that a FTSE tracker fund will do you fine.
But if you want something a bit more tailored – well one of our favourite investors just had a chat with Merryn the other day, and he told us about his favourite banking stock. There’ll be more on that in our 20th anniversary issue.
If you don’t already subscribe and you want to get your hands on it, you need to sign up now – it’s out on 6 November. You get your first six issues free – what are you waiting for?