Banks given access to cheap money to lend to businesses and households

In this week’s bulletin:

  • Financial markets’ initial response to news that Greece has voted to stay in the euro is positive
  • Greek leader casts aside future doubt about its membership
  • The results of the Greek election have been well-received by EU leaders
  • Investors have also welcomed the news – fund manager Stuart Mitchell believes Europe is closer to finalising its blueprint for the future
  • Investors’ worries over Spain remain elevated, despite €100 billion bailout for its banking sector
  • Bank of England boosts UK growth prospects with surprise £140 billion lending and liquidity package
  • Banks given access to cheap money to lend to businesses and households
  • Wall Street optimism rises over likelihood of further stimulus by the US Federal Reserve.

 

Global markets welcome Greek election result

  • Financial markets’ initial response to news that Greece has voted to stay in the euro is positive
  • Greek leader casts aside future doubt about its membership

European markets rose in early trading after support for pro-bailout parties in Greece’s elections. New Democracy, which came top, has backed the two bailouts of Greece by the European Union (EU) and International Monetary Fund (IMF). There had been fears that if anti-bailout party Syriza had won, Greece could have been forced out of the euro and acted as a catalyst for contagion across the region. European markets were up marginally following strong gains in the Far East. Japan’s Nikkei 225 Index and South Korea’s Kospi both closed up 1.8%, while Australia’s ASX 200 added 1.9%.

“The Greek people voted today to stay on the European course and remain in the eurozone. There will be no more adventures. Greece’s place in Europe will not be put in doubt.”

Antonis Samaras, the leader of the New Democracy party

 

Collective sigh of relief

  • The results of the Greek election have been well-received by EU leaders
  • Investors have also welcomed the news – fund manager Stuart Mitchell believes Europe is closer to finalising its blueprint for the future

The elections in Greece were being watched closely not just by eurozone leaders but also investors across the globe. Greece has received two bailouts in the past two years: it was given an initial package worth €110 billion (£89 billion; $138 billion) in 2010, followed by another one last year worth a further €130 billion. However, the EU and IMF have attached tough austerity measures, including state spending cuts, as pre-conditions to those packages. There have been various demonstrations against those cuts in Greece and the Syriza party had said that it would renegotiate the conditions if it came to power. It had led to fears that, if eurozone leaders and Athens did not agree on the existing terms, Greece may be forced to leave the eurozone. There were concerns that such a move may spread contagion to other eurozone countries and result in turmoil in the global economy. Even though the crisis in Greece has not been solved, the result of the elections had made some investors optimistic that it may have bottomed out. Of course, time will tell whether the collation government holds during a prolonged period of austerity, even if it is successful in negotiating easier terms from other European leaders.

It is always important to keep a perspective in these matters and European equity manager Stuart Mitchell made the following points this morning. “The Greek results are positive and no doubt its new leaders will succeed in forming some form of government. But for us this is just part of the process towards a blueprint for Europe which ultimately will see Germany agreeing to the issue of eurobonds, thus seeing the sharing of debt and greater stability of the region going forward. So events are developing much as we expected and it does feel that the crisis is coming to a conclusion, albeit probably many months away.”

“It’s not that we are trying to be optimistic; it’s just how we continue to see things.”

Stuart Mitchell, European equities manager

 “From a corporate perspective, we are finding that the types of business we have invested in – luxury goods, high-end motors and the like – remain very confident, with Scandinavia booming and Germany and France continuing to do well. Admittedly there is weakness in Italy and Spain; but our businesses are global and less than 3% of their turnover comes from these areas. Earnings are expected to grow by 10% this year and we see no change for the second quarter with results likely to beat expectations. Share valuations remain low and, at grass-roots level, businesses remain buoyant. It’s not that we are trying to be optimistic; it’s just how we continue to see things.”

 

Spain in the spotlight

  • Investors’ worries over Spain remain elevated, despite €100 billion bailout for its banking sector

Whilst the outcome of this weekend’s election in Greece is undeniably good news, it is quite likely that investors may, after the initial feel-good factor, reflect further on what it means for the longer term. Last week was a good example of just how fickle and transient investors’ behaviour can be. Following the news that the EU would pump some €100 billion into Spain’s ailing banking sector, markets rallied strongly only for those gains to be lost by the afternoon. It became clear that the markets were not wholly convinced that even such a large sum would be sufficient to put the country’s banks back on a firm footing. Exacerbating matters was a decision by the ratings agency Moody’s to cut Spain’s credit rating to one notch above ‘junk’ last Wednesday. As a result, yields on Spanish government debt rose once more close to the 7% level which is seen as the threshold for a full sovereign bailout. Even though the yield fell back slightly later in the week, analysts fear that the country may have to pay even higher interest rates while raising money in the near future. So it was no surprise that tensions were running high in the run-up to Greece’s elections, with many investors nervously watching from the sidelines.

 

Bazooka for Britain’s banks

  • Bank of England boosts UK growth prospects with surprise £140 billion lending and liquidity package
  • Banks given access to cheap money to lend to businesses and households

Here at home, Britain’s struggling economy was thrown a lifeline by the Chancellor and Bank of England (BoE) Governor, Sir Mervyn King, when they offered an initial £100 billion to UK banks to boost lending and help the sector to protect itself against a worsening eurozone crisis. Sir Mervyn said that the authorities were responding to events that had “grown to cast a long shadow over our own economy”. Analysts see this as a volte face by the governor who has previously said that using QE was the best way to boost the economy. There are of course criteria for the banks to meet in order to qualify for the new ‘Funding for Lending Scheme’ which is intended to make it easier for them to issue lines of credit to households and businesses and so boost spending and growth. In terms of how the scheme will work, the BoE provides low-cost lending for up to four years for which banks provide loan collateral. The banks then use this cheap money to fund lending to homes and business.

The big question of course is whether it will work. Some argue that UK banks are not suffering from a shortage of liquidity; but rather a situation where the credit-worthy do not wish to borrow and those who do want to borrow are seen as insufficiently credit-worthy. Will borrowing costs fall? One would like to think that new loans would be cheaper as a result; but judging from the stock market’s reaction, which saw banking shares jump sharply last week, it might appear that investors believe banks will actually be able to increase their margins and boost profits. The other aspect is whether the numbers are large enough: the Funding for Lending Scheme coupled with the new 6-month lending programme – to ease liquidity – totals some £140 billion. However, it appears that in the small print the BoE is also going to give permission for banks to release part of the huge cash piles that it has ordered the banks to accrue over the last three years. This change in policy could, it is estimated, see a further £150 billion released for loans to companies and consumers. This means that the stimulus package could total some £300 billion or so, almost equivalent to the £325 billion the Bank has already pumped into the economy via its quantitative easing programme. Of course there is a lot of detail to be worked out and question marks remain over the mechanics of the schemes; but it certainly shows that UK policymakers are determined not to allow the UK’s recovery to be snuffed out because of the eurozone crisis.

 

Market eye

  • Wall Street optimism rises over likelihood of further stimulus by the US Federal Reserve

Away from Europe, global markets made positive progress last week despite eurozone headwinds, particularly in Asia where shares in Hong Kong climbed 4% on the week. On Wall Street there was some optimism about the possibility of the Federal Reserve unveiling further stimulus measures – possibly at its policy meeting this week. Recent US economic data has been disappointing after the better figures seen in the first quarter. Retail sales and jobless data last week provided further evidence that growth was slowing; whilst alongside this data, consumer prices pointed to a benign inflation backdrop. The rate of headline inflation actually fell below the Fed’s 2% target for the first time in 16 months, implying that this would allow the Fed some headroom to stimulate the economy. The markets have been trying for some while to second-guess Fed Chairman Ben Bernanke, believing that he will announce a major new policy expansion by late summer in the form of QE3, despite his recent non-committal comments to Congress.

Overall investors remained cautious, being happy to buy US Treasuries despite the yield on a ten-year bond dropping to 1.57%. This contrasted with German Bunds where yields ticked up as investors took the view that further eurozone problems would mean richer economies such as Germany bearing the brunt of the cost. Notwithstanding this, the euro managed a modest rise over the week to $1.26; although most investor interest focused on the yen, which is perceived as a safe currency haven in difficult times. So, by the end of the week most assets had firmed somewhat, as markets awaited the outcome of the Greek election. For private investors the strategy of asset class and geographic diversification, coupled with an ‘income for growth’ approach, continues to be the best way, in our view, to reduce volatility and create more certainty looking ahead.

The NHS Bill – watch out Enterprise Britain

Two weeks ago this blog set out the argument that the proposed restructuring of the NHS could so absorb Government expenditure that any future support for Britain’s enterprising businesses could be affected.

The final stages of the Health and Social Care Bill are proving so controversial that the future is even more uncertain. The statistics are deeply worrying:

  • 151 Primary Care Units are to be replaced by 279 clinical commissioning groups reporting as hubs to four Strategic Health Authorities. This represents a massive overhead increase
  • These changes are expected to cost perhaps £3bn. The new national commissioning board has two executives on £170,000+ and seven board members
  • McKinsey and KPMG are already on multi-million pound contracts to support the commissioning process
  • The NHS is supposedly saving £20bn as part of the austerity measures. Staff numbers are being cut, waiting times are collapsing and targets are being abolished. In a late change Downing Street altered this objective to “saving up to £20bn…”
  • The Care Quality Commission, whose budget has been cut by 30%, has 900 inspectors to check 8,000 GP practices, 400 NHS Trusts, 9,000 dental practices and 18,000 care homes.

It is already known that some GPs are setting up clinics and referring their own patients to them.

It is probable that the Bill will pass through Parliament such is the fragile nature of the Coalition Government. It could be at least two years before the real truth emerges as doctors prepare to gorge themselves on the £80bn Andrew Lansley is giving them.

Whilst this is going on Britain’s equity markets are failing to provide the support to SMEs that is desperately needed. PLUS Markets is up for sale and the share price (£0.98p) suggests the market has written them off. AIM remains dogged by regulatory costs and is not supporting smaller companies. The Treasury has yet to launch its SEED EIS scheme (announced by the Chancellor in his Autumn Statement) and is basing most of its fire power on trying to create specialist funds.

If this carries on we’ll all need a doctor. Unfortunately the NHS service will mean longer and longer waiting lists and to get immediate treatment may mean resorting to private health care.

That is exactly what will be the outcome of Andrew Lansley’s reforms. Disgraceful.

 

Britain is in a Keynesian liquidity trap

It is pretty obvious that the Prime Minister and the Chancellor of the Exchequer have little or no idea on how to stimulate Britain’s stagnating economy. The Monetary Policy Committee will meet this week and huff and puff in a self-important way.

It might help if they understood what is the problem. There’s no credit in the country. Put another way, there’s a Keynesian liquidity trap.

The UK broad money measure (M4) is reducing by 2.6% annually. This simply shows that there is less money in the system. However, the reserve balances of the banks are up by 17.1%. Much of this is due to the Bank of England’s asset purchase scheme. In November there were purchases of £15bn of gilt-edged securities which added to the money supply. M4 fell further.

The reason the banks are not lending their excess liquidity is mainly because of the regulator’s requirement that they hold higher reserves. “No more Fred Goodwins on our watch” they cry. The FTSE 100m companies are awash with cash and they are hanging on to it.

With continuing uncertainty over whether the banks will need to make further reserves against bad debts and the fears of an unsettled Eurozone there is little room for stimulating the economy without expanding government borrowing. That is under pressure because of the lack of growth.

Perhaps the only liquidity is alcohol consumption and maybe that is exactly what the confused mandarins are doing!

 

The Alternative Investment Market (AIM)

In the last quarter of 2011 16 companies joined AIM and 24 left. Britain’s main provider of early stage equity finance is in a desperate state. This is adding to the liquidity crisis as well as causing mayhem in the brokerage community.

The additional regulatory requirements now mean that it is expensive to join the junior market. For an introduction of its shares (without fund-raising) an applicant business might have to pay between £500,000/£600,000. In addition, the demands of the process will place a great workload on the executive strength of the company.

The new SEED Enterprise Investment Scheme which is awaiting the Finance Bill 2012 for final approval is brilliant and creative. Unfortunately the maximum that can be raised is £150,000 per company (and only once). However it shows that there some innovative thinking with the Treasury.

More please, much, much more. Britain urgently needs liquidity.

A Christmas message for Britain’s Middle Class: “You’re doomed.”

“What right have you to be merry? What reason have you to be merry? You’re poor enough.” (Scrooge to his nephew. ‘A Christmas Carol’; Charles Dickens)

While St. David of Etonia is lecturing the Clergy on Christian morality and George is hoping that the word ‘growth’ will be avoided during his five star Christmas lunch, Middle Britain is playing a Christmas game called ‘Secret Santa.’

Its objective is to hide from the kids the fact that the parents are broke. The family gathers together and all the names are thrown into a hat. Each person draws a piece of paper and buys a present (within a pre-set amount) for the named person. Each individual receives only one present but such is the excitement nobody notices.

Various sources including YouGov/The Samaritans and the Office for Budget responsibility have produced statistics showing that 58% of individuals are worried that they won’t have enough money to live comfortable in 2012, 36% fear job loss and the average personal debt expressed as a percentage of household income is now 175%.

The cost of living is rising at more than twice the pace of underlying inflation. The Nationwide consumer confidence index is at 40 compared to its long run average of 77. Last Saturday, outside the Marks & Spencer car park in Milton Keynes, there were empty parking spaces.

For the older people, (and ten million people alive today will live to be a hundred) the spiralling of the National Health Service (“NHS”) into debt and chaos as a result of the ludicrous decision to give doctors and other medical professionals budget control (“for the good of the patient” you will appreciate), despair is their keynote word.

The Coalition Government has been together (well, vaguely) for twenty months. The early mantras “it’s all Gordon Brown’s fault” and “we’re all in this together” have been replaced by schoolboy theatricals (the vetoing of the Brussels accord) and an Autumn Statement by the Chancellor which must rank as one of the most inept ever heard in the House of Commons.

NOTHING has been done to help Middle Britain. The housing market remains dormant, the banks are simply hoarding cash, the credit card companies are screwing their cardholders with ridiculously high rates of interest, real incomes will fall 2.8% in 2012, unemployment is getting on for three million, public services are being decimated and police numbers are being cut. Oh, and the national debt is…er…increasing? Economic growth is non-existent.

Middle Britain will survive and fight on because they are the key strength of this country. The four million people owning and managing their businesses will fight another day, harried by HM Revenue Officers and Vat inspectors, ignored by banks, faced with ineffective equity markets and burdened with red tape.

Nobody argues that the Coalition inherited a difficult situation.

We never thought that they would make it worse.

Happy Christmas…perhaps.

No Christmas presents from you then, George!

The recent Autumn Statement delivered by the Chancellor on 29 November 2011 was vague, meaningless and now mostly forgotten. Economic growth was non-existent and the decline continues. To detract from his hopeless position George’s friend St. David is lecturing the world on Christian morality. It is the oldest PR trick in the book.

Enterprise Britain does not forget and continues to fight for the empowerment of Britain’s brave business owners, managers and workers.

It was with interest that we noted three measures to help SMEs. Two were irrelevant and the one that did take our interest was the ‘Seed Enterprise Investment Scheme’ (“SEIS”). George could hardly contain his excitement at this ‘Dragon’s Den finance’. There is a clause in the HM Revenue & Customs proposals which show this to be utterly misleading.

Before revealing George’s hypocrisy let’s examine the detail. The full facts will not be known until the Finance Bill 2012 is enacted. However it is a fairly reasonable bet that the following are the main points:

  1. A qualifying company (UK based, not property or financial services) may raise £150,000 once only.
  2. It must have net assets of less than £200,000 and employ less than 25 people.
  3. The company must be less than two years old: it can be a new company.
  4. The maximum investment per individual is £100,000. The shares must be held for three years.
  5. The investor receives income tax relief of 50% and a Capital Gains Tax (“CGT”) allowance of up to 28%. All share gains and dividends are tax free.

Therefore a high earning investor with CGT claims will pay a net £2,200 for an investment of £10,000. It is an extraordinary proposal.

However the following questions have proved difficult to answer:

  1. Will SMEs receive appropriate advice and who will pay the bills?
  2. Who advises the SME on the value of their business? What percentage of the company will £150,000 ‘buy’?
  3. If the company fails to keep to the rules investors may lose their reliefs and be forced to pay the money back. Do company directors understand these risks?

Enterprise Britain wants this scheme to be a success and hopes that answers can be found to these questions.

But what does George really think?

In the small print is the following statement:

“It is estimated that 300 or more companies will benefit from investment under the scheme in its first year.”

Thus the Chancellor is estimating that the SEIS will raise £45 million for Britain’s SMEs assuming all 300 companies raise the full £150,000. There are over four million SMEs in the UK.

Happy Christmas George.