This week:

  • Greece’s anticipated rescue package from other EU member states fails to materialise, causing widespread concerns and possible contagion to Portugal, Ireland, Italy, Greece and Spain.
  • Euro slides on the back of a troubled Europe and the implications of a Greek sovereign debt default.
  • China’s Central Bank announcement of increasing requirement on banking reserves impacts global stock markets and commodities.
  • Barclays cuts bonus payments, with two senior executives announcing that they will forgo cash bonuses for 2009.
  • Overall, £1.29bn-worth of dividends lost last year as UK companies slashed payments by 15 per cent. However, defensive stocks such as pharmaceuticals and tobacco stocks increased payments.
  • Warren Buffett’s Berkshire Hathaway completes S&P 500 listing.
  • Latest Barclays Equity Gilt Study reassures on long-term equity investment.

This weekly Briefing Note aims to pick out some of the key financial and economic issues touched on in the press over recent days and from time to time includes the views of some of our independent fund managers.
It was a slippery end to the week in more ways than one as the Winter Olympics started in Vancouver at the weekend, and China’s banking reserve announcement sent investment markets on the slide on Friday.
Despite an extremely nervous end to the week, UK and US markets ended it in positive territory with the FTSE 100 closing the week 1.6 per cent up and the S&P 500 closing up by 0.9%. However, fragility returned when events in Europe and China caused investors’ appetite for risk to retreat.
As reported in The Sunday Telegraph, the widely anticipated bailout package for Greece from the other European member states failed to materialise from Thursday’s emergency summit of EU leaders in Brussels, with Angela Merkel, the German chancellor, insisting that Greece should cut its budget deficit by 4 per cent before the rest of Europe run to the aid the struggling country. After the initial statement from EU leaders was digested, the lack of any detailed commitment became obvious and markets moved into retreat. Whilst Greece is a relatively minor eurozone economy, representing about 3 per cent of the region’s GDP, the impact of a default on its debt commitments could be contagious with many now fearing the panic could spread to Spain, Portugal, Italy and Ireland – all of which are also suffering from ‘ballooning budget deficits and overburdened consumers.’
These fears are also placing the European currency under relentless selling pressure with the euro already having lost 5 per cent of its value against the dollar – falling to an 8-month low on Friday and one analyst commenting “The question is not whether to sell the euro or not, the question is when and at what level.”
Analysts are predicting further losses for the euro against the dollar, with a short-term target of $1.30. For this trend to change, and for confidence to return, investors have to believe that Greece, and the other troubled eurozone counties, will be able to cut their deficits and lower debts and if not, that the other EU countries will rush to their aid.
It was the fragility in equity markets in part caused by Greece, which many blamed for three private equity backed businesses to pull from their initial public offerings in as many days. This series of events started on Thursday when the Blackstone-backed Travelport £2.16bn floatation ‘derailed’. Theme Park operator, Merlin Entertainment, which owns the London Eye, Legoland and Alton Towers, postponed its £2bn public listing on Friday. This was closely followed by New Look’s decision to call off its return to the stock market after announcing its intention to do so earlier this month.
Enter the Dragon
China’s move to restrain credit growth rattled global stock markets on Friday with China’s central bank announcing that banks should hold 16.5 per cent of their deposits on reserve from 25 February, up by 0.5 per cent. This sparked fears that tighter monetary policy from the world’s fastest growing economy, could stall the global recovery. The increased reserve requirement follows the realisation that loans made by Chinese banks in January were 3 times more than the previous 3 months combined.
Access to easy credit was at the heart of the country’s rapid recovery over the past year, which had seen its economy grow by more than 10 per cent in the final quarter of 2009. However, one Standard Chartered analyst, commenting in The Financial Times, argues that the move by China’s central bank was ‘technical liquidity management, not monetary tightening’ and was aimed at controlling asset bubbles forming and controlling the boom so we don’t have to experience the bust in the second half of the year. The announcement impacted mining stocks on Friday as the thought of a stalling Chinese economy hit commodity prices, with oil falling 3 per cent to $73 a barrel, and copper and gold also losing ground.
Barclays Bonus
Banking bonuses were front-page news once again as John Varley and Bob Diamond, Barclay’s two most senior executives, announced that they will forgo cash bonuses for 2009 as the bank looks to fend off public backlash over multibillion-pound payouts to its staff. This move also seems to be a reaction to the message from central government to show ‘restraint’ over the level of bonuses paid. The Financial Times reported that the bank, which will be the first of the UK banks to report 2009 results tomorrow, is expected to post profits of about £10.3bn for 2009. Barclays has moved to reduce the proportion of revenues paid out in bonuses to their lowest level in a decade and down from 44 per cent in 2008. This is a move that will align it with the recent actions of international rivals and compares to the 36 per cent paid out by Goldman Sachs and the 33 per cent paid by JP Morgan. The level of bonuses being paid by Barclays is still expected to incur a penalty of £200m in order to meet the UK bankers’ bonus tax imposed by the Chancellor, Alastair Darling.
Dividend Pressure
In The Financial Times Money it was reported that investors lost £1.29bn-worth of dividends last year as UK companies slashed payments by 15 per cent, leaving income seekers with limited choice of high-yielding shares.
Some interesting statistics were unearthed in the article, which stated that in total 202 UK companies cut their dividends in 2009, and more than one third of these paid no dividend at all. Another 60 companies froze their payments as they aimed at preserving cash in an environment of falling profits and the pressure to finance themselves. Banking shares, traditionally favoured by income investors, dragged the payouts ratio down. The state owned Lloyds Banking Group and RBS were not able to pay dividends, and even HSBC cut its payment. However, defensive stocks managed to increase their dividend payments by 5 per cent in 2009. Pharmaceuticals paid 20 per cent more while tobacco, electricity and food retailers increased their payments by around 10 per cent. The message for income investors is clearly one of selecting a high quality income manager to make those choices on their behalf.
Tracking Hathaway
Warren Buffett’s Berkshire Hathaway completed its listing on the S&P 500 on Friday after the markets closed for trading. Mr Buffett has run the conglomerate for 45 years and the $176bn firm owns businesses ranging from chocolate makers to banks, and has recently completed the acquisition of railway operator, Burlington Northern Santa Fe. As The Saturday Telegraph pointed out, the listing will result in millions of Americans now owning a piece of the firm through consumer backed investment funds that track the index. It is estimated that these index funds have had to buy 150-175m ‘B’ shares worth between $11.3bn to $13.2bn in order to ensure the correct weighting to accurately track the index. The article went on to say that, ironically, the American public’s increased exposure to Berkshire follows the conglomerates recent loss of its triple-A credit rating amid concerns over its debt position. Yet long-term, few would bet against the ‘Sage of Omaha’ delivering excellent returns for shareholders.
BEGS the Question
The Saturday Telegraph reported on the widely awaiting Barclay’s Capital Equity Gilt Study (BEGS) being released. The study, which compares the fortunes of shares, gilts, corporate bonds, deposit and inflation, uses data from as far back as 1899 to spot trends and fashions of these mainstream investment instruments.
Despite 2009 recording the best equity market returns for more than 20 years, it doesn’t take a study of this nature to tell us that it has been a dismal decade for shares. However, the study does provide some measure of reassurance over the long held theory that holding shares over the longer term can produce better investment results versus cash and fixed interest (bonds). Contained in a table showing the probability of shares beating bonds or deposits over varying holding periods, the Study shows that there is 75 per cent probability that shares will beat cash and bonds if held for five years. This percentage increased to 89 per cent for bonds and 99 per cent for cash over a holding period of 18 years.

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