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BANKING ON A BARGAIN: ARE BANKS THE CHEAPEST SECTOR IN THE UK?

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BANKING ON A BARGAIN: ARE BANKS THE CHEAPEST SECTOR IN THE UK?

By Michelle McGrade, chief investment officer, TD Direct Investing

This week is a big week for the UK’s Big Five banks, with HSBC, Lloyds, Barclays, RBS and Standard Chartered all due to report their full-year results, amid hampered economic growth, lower for longer interest rates, and the looming threat of challenger banks to the status quo. Ten years ago, banks provided almost a quarter of all dividends in the UK market. However, following the financial crisis, they went through the wringer; not only did their share prices plummet, but many were forced to suspend dividend payments too, most notably Lloyds and RBS.

Since then, UK banks have been rebuilding their balance sheets and are now returning to form. In fact, our latest data shows an increase in trades in banking stocks of 29% during 2016.

The health of these businesses is reflected in their dividends, with HSBC, Lloyds and Barclays now paying a good level of dividend yield. In 2015, Lloyds announced its first dividend since the government stepped in to bail it out in 2008. Data also shows that the banking sector is the cheapest sector in the UK, meaning it could be attractive to bargain-hunting investors in the current environment.

Banks are bringing back dividend joy

According to Capita’s UK Dividend Monitor report in January 2017, £10.4bn was paid out in dividends by the banks in 2016, mainly HSBC. HSBC, the UK’s second largest payer, distributed £7.5bn, up 17% year-on-year, thanks in no small part to the weaker sterling. Special dividends were also part of the story. Strong profit growth at Lloyds prompted a special dividend of £360m. HSBC has been in the top three dividend payers in the FTSE All-Share index every year since 2008 (see appendix A)

Meanwhile, a number of challenger banks including Aldermore and Shawbrook, which are making use of leading edge technology, could be positioned to disrupt the banking sector and continue to deliver growth and earnings. TD Direct Investing customers have picked up on this challenge to the status quo, with trades up 188% over the course of 2016.

While ratings agency Fitch raised concerns about the banking sector in the immediate aftermath of the decision to leave the European Union last June, banks’ strong balance sheets should allow them to cope with moderate negative shocks going forward.

So, how can investors gain access to banking stocks?

Investors who are looking to gain access to banking stocks can do so via funds with a significant allocation to financials including Schroder Income, Majedie UK Equity, JOHCM UK Dynamic and Old Mutual UK Alpha.

Schroder Income’s managers seek income opportunities across the entire market, including lower yielding companies where they anticipate dividend growth. Therefore, they don’t restrict themselves to the highest yielding companies that are the largest contributors to the yield of the FTSE All-Share index.

Banks remain an attractive investment opportunity in the long term. They will be beneficiaries when interest rates rise from their historic lows. While the timescale for rate rises remains uncertain, an upwards trajectory seems the most likely outcome which will allow banks to increase their margins. Their profitability will also be boosted by increasing inflation. In addition, banks continue to focus on cost-cutting to deal with economic and structural challenges.

Appendix A

chart
Source: Morningstar Direct (As at 31 January 2017)

Note: Metro Bank and Clydesdale Bank have been listed on the LSE for less than a year.

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GameStop stock doubles in afternoon; even Reddit is surprised

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GameStop stock doubles in afternoon; even Reddit is surprised 1

By David Randall and Sinéad Carew

NEW YORK (Reuters) – GameStop Corp shares more than doubled in afternoon trading on Wednesday, surprising those who thought the video game retailer’s stock price would stabilize after recent hearings in the U.S. Congress prompted by the fierce rally and steep dive that upended Wall Street in January.

GameStop shares were up 60% after hours at around $146, following a 103% rise during the day’s trading.

Trading in GameStop was halted several times following a rally that began around 2:30 pm Eastern time Wednesday with no obvious catalyst.

Analysts that follow the stock could not point to one single reason for the sharp move, offering reasons that included a corporate reshuffle.

“GameStop announced the resignation of its CFO last night. Some may have taken this as a good sign that RC Ventures is making a difference at the company in terms of trying to accelerate the shift to digital,” said Joseph Feldman, an analyst at Telsey Advisory Group.

Stephanie Wissink, analyst at Jefferies Research declined to comment on the afternoon stock spike but referred to her research report following the CFO resignation. Wissink said it did not seem like a coincidence that the CFO resigned after the company settled with activist investor Ryan Cohen’s RC Ventures.

“We expect GME to pursue a CFO with a more extensive tech (vs. retail) background, which will be a signal of the direction the company is due to take in coming years,” Wissink wrote in her note.

The spark also seemed to take posters on Reddit’s popular WallStreetBets forum by surprise.

“Why is GME going back up. is it Melvin covering?!,” one user wrote.

In January, shares of GameStop soared more than 1,600% as retail investors bought shares to punish hedge funds such as Melvin Capital that had taken outsized bets against the company. Melvin Capital said it lost 53% before closing its position in GameStop.

Other so-called “stonks” – an intentional misspelling of ‘stocks’ – favored by retail traders, also shot higher in Wednesday afternoon trading. AMC Entertainment Holdings Inc gained 18%, while BlackBerry Corp rose nearly 9%. Shares of Canadian cannabis company Tilray Inc gained nearly 13%.

The retail trading frenzy was the subject of hearings in Washington last week, where Keith Gill, a Reddit user and YouTube streamer known as Roaring Kitty who had boosted the stock with his videos, reiterated that he was a fan of the stock.

Shares of GameStop remain nearly 74% their all-time high reached on Jan. 27 despite Wednesday’s rally.

(Reporting by David Randall; Editing by David Gregorio)

 

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Analysis: Central banks say no tapering. Markets aren’t buying it

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Analysis: Central banks say no tapering. Markets aren't buying it 2

By Sujata Rao and Dhara Ranasinghe

LONDON (Reuters) – Central bankers worldwide have been unequivocal: There are no plans to cut back on money-printing any time soon, let alone raise interest rates.

Markets don’t seem to be buying it.

U.S. 10-year Treasury yields rose on Wednesday to one-year highs above 1.4%, extending this year’s near 50 basis-point jump that has dragged up sovereign borrowing costs in Europe, Japan and elsewhere.

The reckoning is that the spending step-up by U.S. President Joe Biden’s administration and post-vaccine economic reopening will fuel a global growth-inflation rebound, forcing central banks to “taper” or withdraw stimulus ahead of schedule.

A brighter outlook may indeed justify higher yields. But what has started to spook markets is a sudden move up in so-called real yields, or returns in excess of inflation. That shift can tighten financial conditions, suck cash from stock markets and in general, hamper the recovery.

It’s spooking policymakers, too. From the Federal Reserve’s Jerome Powell to New Zealand’s Adrian Orr, many have weighed in this week to stress policy will remain loose for some time.

But the mantra they have chanted for years seems now to be falling on deaf ears.

Powell, the world’s most powerful central banker, knocked yields just a couple of bps lower even after commenting that the inflation target was more than three years away.

Euro zone yields only briefly heeded European Central Bank chief Christine Lagarde’s warning on Monday that the bank was “closely monitoring” the recent rise in yields.

(GRAPHIC – Who’s uncomfortable with rising bond yields?: https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrdbewve/de2402.png)

(GRAPHIC – Powell reassures bond markets but yields stay high: https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgdmzapq/US2402.png)

The reason, according to ING Bank is that markets are pricing “with an increasing degree of conviction” the end of ultra-easy policies.

“Market confidence in the strength of the U.S. recovery is so strong and widespread that the tapering boat has sailed already,” they said, predicting “tapering” to happen by the end of 2021, earlier than the early 2022 predicted by Fed surveys.

“We expect consensus is converging to our view,” they added.

Money markets show investors expect a Fed rate rise next year; some bet on an even earlier move. Euro-dollar futures suggest a roughly 64% chance of a 25 basis-point rate hike by the end of 2022. A week ago it was seen at 52%.

If travel, dining out and shopping fully resume in coming months, it could unleash trillions of dollars in pent-up savings worldwide. Just in the United States, personal savings totaled $2.38 trillion at a seasonally adjusted annual rate in December, higher than at any time before the pandemic.

(GRAPHIC – U.S. savings: https://fingfx.thomsonreuters.com/gfx/mkt/azgpoeylypd/Pasted%20image%201614185996035.png)

That makes it an inflection point of sorts for the economy, according to April LaRusse, head of fixed income investment specialists at Insight Investment. At times like this, even strong forward guidance can fall flat, she said.

“Markets hear central bankers saying ‘Stop it, markets, you are going too far’, but they are worrying central banks might change their mind as new data emerges,” LaRusse said.

“Markets are saying: ‘Yes, we believe what you are saying, but conditions could change and could necessitate a change of policy’.”

ELSEWHERE

It’s a similar picture elsewhere.

In New Zealand, Orr’s highlighting of potential downside risks to the economy contrasted with the buoyant picture painted by data.

Bond yields shrugged off his comments to hit 11-month highs. More importantly, overnight index swaps (OIS), instruments allowing traders to lock in future interest rates, have started pricing a small possibility of an end-2021 rate hike.

Not long ago it was seen cutting rates below 0%.

BNY Mellon noted across-the-board rises in one-year forward inflation swaps — essentially gauges of future inflation — from Canada to Australia.

“Risks are now more toward further removal of easing prospects,” they added.

There is of course the possibility that the pledges to keep policy ultra-loose in the face of recovering growth only fan inflation expectations further. So, could markets force central banks to act rather than just jawboning?

Here the Fed faces less of a dilemma than its peers.

Japan’s 10-year yields are near the highest since late 2018 at 0.12%, posing credibility issues for a central bank that aims to hold yields around 0%.

The ECB too, already struggling to lift growth and inflation, may have to step up bond purchases under its emergency asset-purchase programme to combat rising yields.

“At the moment it’s a tension between markets and central banks rather than a conflict, though that might come,” said Jacob Nell, head of European economics at Morgan Stanley.

“The attitude of the Fed is that if markets think growth is stronger than we do then that’s fine, it will help growth and inflation expectations. So the Fed won’t fight the market — it just doesn’t believe it.”

(Reporting by Sujata Rao and Dhara Ranasinghe; Editing by Hugh Lawson)

 

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Energy, bank stocks drive FTSE 100 higher

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Energy, bank stocks drive FTSE 100 higher 3

By Shivani Kumaresan and Amal S

(Reuters) – Britain’s main stock index recouped early losses to end Wednesday higher, as gains in commodity-linked and banking stocks on investor optimism about a post-pandemic economic recovery outweighed losses in defensive sectors.

After falling as much as 0.8%, the commodity-heavy FTSE 100 index closed up 0.5%, with oil heavyweights BP and Royal Dutch Shell providing the biggest boost with gains of 5.4% and 3.3%, respectively.

Mining stocks including Rio Tinto plc, Anglo American Plc and BHP added between 0.7% and 1.5%, boosted by higher metal prices.

“One of the main drivers for the FTSE over the next few months is going to be investors’ interest in a possible commodity super-cycle,” said Andrea Cicione, head of strategy at TS Lombard.

“If commodities continued to perform as strongly as they have over the past few months, well that’s going to benefit disproportionately.”

British bank Barclays jumped 3.4%, while other lenders rose as Bank of England Governor Andrew Bailey said Britain will resist “very firmly” any European Union attempts to arm-twist banks into shifting trillions of euros in derivatives clearing from Britain to the bloc after Brexit.

Defensive plays such consumer staples, healthcare and utilities were among the top laggards.

The domestically focused mid-cap FTSE 250 gained 1.2% and marked its best day over a week, on hopes that speedy vaccination will help ease coronavirus restrictions faster.

In company news, Metro Bank fell 9.9% as it posted a much bigger annual loss and said it expects defaults to rise through the year as government support measures set in place due to the COVID-19 crisis are wound down.

Consumer goods maker Reckitt Benckiser shed 1.5% even as it capped 2020 with the strongest sales in its history, while Aviva slipped 0.5% as it agreed to sell its 40% stake in a joint venture in Turkey for 122 million pounds ($173.2 million).

(Reporting by Shivani Kumaresan and Amal S in Bengaluru; editing by Anil D’Silva and Emelia Sithole-Matarise)

 

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