Time was when you would regard an investment in a bank as a sound blue-chip opportunity. But many investors and traders are concerned and do not know what to think about the modern banking industry. The banking sector follows closely the wider economy and has bene hit hard by a crisis that has debt and liquidity at its core. Ever since the financial meltdown in 2008, there have been questions hanging over even the largest of banks, and in several countries many financial houses were supported by government action to maintain market liquidity. Yet curiously the same banks which were “rescued” seem to be doing very well, thank you, with continued large bonuses to their executives, or at least golden handshakes.
One reason for this is the nature of the bailouts, which frequently included low interest funds which bankers, being bankers, could put in places where the money was treated best, effectively profiting from taxpayer subsidies. Often the money was not directed to personal customers wishing to receive bank loans, who could be regarded with suspicion since the credit default swap debacle, thus some of the aims of government intervention were frustrated.
“Interest in bank equities has ebbed away due to the short-term volatility risk but things could change quickly depending on the events of coming months. It wasn’t long ago that banks were considered safe and secure and featured heavily in many investment portfolios. The financial problems they suffered have been well documented and a number needed support to stay in business and help rebuild their balance sheets. However, if the restructuring and de-risking of banks proves successful then their shares could rise significantly in price. This is still a big ‘if’ and so, while there is potential, all but the most aggressive investors should limit the exposure they have to bank shares in their portfolios.”
Despite the apparent recovery of the market sector, there remain some questions over the long-term future. UK banks may not be as impacted by the eurozone’s troubles as their continental brethren but they still suffer a jolf ever time Greece’s or Spain’s troubles escalate. For instance when negative news emerging out of the Eurozone hits 10% off Italian or Spanish banking shares, UK banks normally can expect a 3% to 4% fall. This means that if you are intending to spread bet on banking shares, you need to keep your wits about you and follow the market closely, relying on technical signals to interpret how the market sympathies are running, but being prepared to bail out if there are signs of trouble.
Spread betting is more about short-term trading than about long-term prospects. The long-term future of much of the banking industry is even now raising some questions, as it seems that subprime and credit losses can still be found, despite the actions taken to purge unsound debt. And the bankers found a nifty little trick to make their books look much better.
You see, every bank is concerned about their capital adequacy ratio, which is how much capital they have to cover their transactions, particularly to cover cases of default. But to avoid precipitating defaults, they have been scared to touch their low-quality loans, such as mortgages, and have instead sought capital by cutting the good loans, which they can capitalize with some certainty. If they sought to close off the questionable loans, then they might be forced to take further write-downs in value.
Overall, this has the undesirable effect of increasing the ratio of low-quality loans and decreasing the holdings in better quality assets, which could potentially lead to problems in the future. But given the question of ongoing solvency, this makes perfect sense to bankers who wish to maintain the façade of recovery.
“Spanish banks have been incredibly volatile of late. Just taking BBVA shares as one example, they lost 37.5% from the start of February 2012 to the end of May, only to bounce back 21% over the following three weeks. That is an incredible amount of volatility which is likely to unsettle even the most seasoned of traders. As such, you will need a strong sense of both risk management and bravery if you want to take on trading around Portuguese and Spanish banks.”
This means that there is no guaranteed overall direction for banking shares, as from year-to-year the situation may change. Share prices are a reflection of the potential future profits, and the market is aware that the economic crisis has not worked through yet, and more surprises could be forthcoming in future. It is not clear whether there will be a need for further regulation to avoid future mishaps.
While these factors are very significant if you’re looking for a long-term investment, for short-term trading purposes they could be valuable in providing you with sharp price moves and profit opportunities. The key to spread betting is to appreciate and understand that the price moves according to market sentiment, and not necessarily in any “logical” or “rational” way according to the published accounts of the company. If you spread trade on the basis of what the market is doing, rather than deciding in advance what it should be doing, then you’re more likely to be on the winning side.
Despite every effort otherwise, the world has not settled back from the global crisis, with most countries still feeling the effects, such as the euro crisis in Greece and Spain. When you have uncertainty, you also have opportunity as long as you can see your way through the confusion.
So to spread bet on banking shares, a good strategy would be to determine the overall trend of the sector, and to find the star performers leading that trend, whether it is up or down at the time you are spread betting. For instance, if the banking sector is increasing in value, you would look for the bank or banks which have made the greatest gains, and with this evidence of strength you could consider taking a long position.
Once the bank in question failed to lead the pack, you might consider closing your bet and selecting another candidate. Or you could simply use a trailing stop in order to exit the bet. Either way, it is a good idea to have a moving stop loss while the trend is continuing.
Given the recently realized volatility of the banking sector, you may find that it can be profitable for you. But you must always bear in mind that volatility also expresses itself as risk, and make sure that you limit your risk of loss by judicious use of stoploss orders.
Note: The other consideration was Banks. Banks always lead the market recovery. I’ve never experienced anything else. When Banks have a high volume large up day with an engulfing candle (as BARC, HSBA & LLOY yesterday), take notice. It means new money is hitting the button.
“Speaking in general terms I agree the world of top finance/running companies is just plain wrong. Just like football management you mess up with one team (company) – you get the sack/resign/agree to part your ways and get a massive payout as a reward!!! For what?? Wish I could do that on normal street; I might even decide to make a living out of messing things up and moving on from company to company. Harsh reality is that for the average joe on the normal street you mess up – you carry the can, get the sack then worry about paying the mortgage. Perhaps if this was the reality for the blessed as well, the world would be in better shape!”
AIM usually leads the main market large caps but not on this occasion. I suspect it’s because a lot of smaller companies trade mostly within the UK or UK and Europe. DGE has stated today that the EU is drinking less as austerity bites. I believe that also applies to a lot of retail and services, so its companies with a global customer base that should perform most reliably or companies that supply exporters with goods and services.
There was an economist on radio 4 recently comparing the UK with the USA. We started in 2008 with the same policy of expanding money but our latest government switched policy and raised taxes + cut spending. Since that switch the US has continued with GDP growth and the UK has stalled. His thoughts were that the US has the best policy which is to wait for private sector growth to reach a point where its tax revenues can sustain public sector cuts without dangering GDP growth. That, he considered would take about five years in total to 2013/14.