Inside the world of business
Pessimism in the face of rising profits? Strange indeed
SOMETHING VERY strange is happening on international equity markets. Data from Bloomberg shows that 54 per cent of analyst ratings on companies in the US, Britain, Japan and Brazil are “holds”, the highest level they have been since Bloomberg began tracking recommendations in 1997.
Although technically advising investors to sit on their stake, a neutral “hold” is often viewed as as a sell recommendation. Last month the combined proportion of “sell” and “hold” ratings on US companies hit 71 per cent.
At face value this doesn’t seem that surprising. There are lots of concerns that economic growth in the US and other developed markets is anaemic and the dreaded “double dip” recession may still become a reality.
But the same analysts who are issuing cautious ratings on public companies are also pushing up their estimates of the growth in profits at quoted companies – particularly in the US. According to the analysts, profits for companies in the MSCI World Index of 24 developed economies will be up by 28 per cent over the next year. Yet, that index is trading at 11.5 times forecast earnings – other than the six months after October 2008 it has never traded at lower than 12.5 times reported earnings.
This same volatility has been reflected on the Dublin market. The Iseq index hit a one-year high on April 26th at 3497.17 but hit a one-year low last Wednesday when it closed on 2607.97.
Although they don’t like to admit it, equity analysts reflect the markets much more than they predict them. Their current pessimistic outlook, in the face of rising profits, has been bred by the rollercoaster market ride this summer.
For Irish investors some more realistic views on the future would go a long way to calm market jitters. In the meantime the brave will find great value in strong firms that are being oversold on the back of general economic fear.
Size does matter
A financial watchdog coming out saying a bank has been undercapitalised since late 2008 – sound familiar? Well, in this case it was Sweden’s regulator announcing the closure of HQ Bank.
Size does matter when it comes to banking closures and the failure of HQ, Sweden’s smallest listed bank, will hardly cause a ripple in the Swedish banking sector. The lender had loans of €340 million in a system with an overall loan book of about €700 billion.
The Swedish regulator brought the shutters down on HQ, revoking its banking licence over the weekend, saying it had overvalued its trading position for a long time and its financial position had been reported inaccurately.
If only matters were as straightforward for the Irish regulator when it came to Anglo Irish Bank, a bank whose future is causing a major headache for Government.
Fianna Fáil and the Greens said they weren’t at cross purposes over Anglo. The main Government party said that it wanted the cheapest option and had not decided on the timing of how soon Anglo should be wound down.
The Greens believe the bank’s plan to split into a good and bad bank has exceeded its original cost and that a wind-down over a four- to five-year period might be better.
The debate is being played out as Anglo today reports another horrendous set of results – driven by deteriorating losses on the first loan transfers to the National Asset Management Agency (Nama).
Sweden’s regulator said HQ had “taken risks that were so large as to compromise its survival”, though not large enough to affect its biggest banks, Nordea, Handelsbanken, SEB and Swedbank.
This is the difficulty with Anglo. The bank simply became too big to fail and, the new Anglo team now claims, winding it down too quickly will force up the funding costs of the State and all banks.
This will be particularly evident next month when the banks need to repay over €25 billion in funding as the blanket guarantee expires.
Inadequate provisions
Speaking of the accuracy of financial results, it is still odd that despite all the issues that emerged over Anglo’s financial results for the year to September 2008, the headline figures did not change between their initial publication at preliminary stage and the publication of the annual report.
The timing difference was less than three months between when Anglo’s old team led by chief executive David Drumm first presented the figures in December 2008 and the publication of the annual report at the end of February 2009 under the stewardship of chairman Donal O’Connor.
In the meantime, the bank was nationalised (in January 2009) and details of the €7.5 billion window-dressing with Irish Life Permanent emerged – as did Seán FitzPatrick’s concealed loans.
Anglo disclosed details on director loans in the annual report and provided a more detailed reference to the ILP transactions in the annual report – and to the Anglo 10 golden circle transaction – but the pretax profit remained at €784 million for the year and impairment provisions of just €879 million – as reported the previous December.
Anglo’s 2010 first-half results, published today, will disclose billions more in bad-debt provisions, showing just how inadequate those provisions were back then – on both reporting occasions.
ONLINE
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TODAY
A clearer picture of the health of the Irish banking sector will emerge with both Irish Life Permanent and Anglo Irish Bank due to publish their interim results for the first half of the year.
