Page last updated at 23:09 GMT, Monday, 4 August 2008 00:09 UK

Wary investors see banks as cheap

Jamie Robertson
By Jamie Robertson
Business presenter, BBC World

John Templeton, one of the last century's greatest investors - and philanthropists - famously said "the time to buy is at the point of maximum pessimism".

BBC Global 30 July 2008

Well, it's pretty hard to find an optimist at the moment, so that could amount to roughly the same thing.

A couple of months ago there were quite a few optimists among commodity investors, but BHP, Anglo American, Rio Tinto have all lost about a quarter of their value since they peaked in May.

This last month BHP is down 12.0%, BP is down 10.3%, Exxon is down 3.9%.

CNOOC, the Chinese oil group is down 15.2%.

Bouncing back

The problem with this reasoning is that however pessimistic you may be now, you could be a lot more miserable a month, or a year, from now.

Best performing
Bank of America - 42.02%
Nokia - 16.06%
HSBC - 12.26%
Siemens - 9.61%
Procter & Gamble - 8.06%

Source: BBC Global 30

Nevertheless, the "maximum pessimism" theory of investment might best apply to the banking sector where Tesco, the British supermarket chain, is taking the bull by the horns and investing nearly $2bn in buying Royal Bank of Scotland's 50% share in Tesco Finance.

RBS likes the deal because it helps recapitalise (with a net profit on the investment of about $1bn) its battered balance sheet, and Tesco likes it because it adds to its policy of diversification away from the domestic grocery business.

Tesco shares are up 2.8% this last month.

And indeed nearly all the bank stocks on the Global 30 have been looking a little frisky of late.

Bank of America appears to have bounced off the bottom rising an astonishing 42% in July after it reported a good second quarter thanks to good investment banking income.

Admittedly writeoffs were a hefty $5.8bn, but that is par for the course these days among the big banks.

HSBC too is up 12.3%. Banco Santander of Spain is up 7.9% after snapping up Britain's Alliance and Leicester for a paltry $2.6bn and reporting a 6% rise in half year profits.

Troubled banks

But the banking crisis isn't over yet. The Freddie Mac and Fannie Mae bail out spelt that out all too clearly.

Worst performing
CNOOC, down 15.19%
BHP Billiton, down11.99%
Mitsubishi, down 11.24%
Exelon, down 10.83%
BP, down 10.27%

Source: BBC Global 30

Two regional banks, First National Bank of Nevada and First Heritage Bank in California, were not so lucky. They collapsed just two weeks after the folding of IndyMac, which itself was the third biggest banking failure in US history.

This is the next phase of the credit crisis, and many are talking about, not tens, but hundreds of failures among the US regional banks.

Ralph Silva, banking analyst at the Tower Group thinks this could actually help the fortunes of the biggest banks.

"We think that there has been a drastic reduction in confidence in small names," he says.

"We estimate there is a 30% preference amongst customers for larger brands, even if their products are more expensive, so there is an exodus from small banks to large ones.

"That's very good for the big banks in the long term, although in the meantime they have to get over the sub-prime crisis."

New style pharma

Another sector showing a spark of life amongst all the gloom is pharmaceuticals.

It is a classic defensive sector, but it has been plagued in recent years by competition from generic rivals and a shortage of multi-billion dollar blockbuster drugs.

GlaxoSmithKline's (GSK) new boss, Andrew Witty, two months into the job, is changing the group's focus towards emerging markets and delivering more regular "products of value", rather than barnstorming wonder-drugs that come along once every 20 years.

To this end he has done a deal with South Africa's Aspen that will allow GSK to market the former's generic drugs in a host of emerging markets. GSK is up 7.7% in July.

Thanks to the credit crunch, global merger and acquisitions are down 40% on a year ago, but Douwe Miedema, M&A expert at Reuters, insists the pharmaceuticals industry is still keen to do deals.

"Many of the older drugs are coming to the end of their patents and the big companies need new products to fill their pipeline," he says.

"So they are finding they have to go out and buy the companies to give them that capacity, like Roche did this last month, spending $21bn to buy the 41% of Genentech that it ddid not already own.

Tumbling Toyota

Investors also focussed on car companies this month, with GM shares sliding to their lowest level since the 1950s and Ford reporting a $9bn loss.

In Europe, Peugeot and Volkswagen were more bullish, but the biggest surprise came from Toyota, which cut its 2008 global sales forecast by 350,000 vehicles, or 3.5%.

The Japanese have been famously more nimble at changing their production lines as fashions and taste change.

But even Toyota, now vying with GM to be the world's biggest car maker, is finding business tough.

By the month end there was talk that it might have to issue a profit warning, and shares are down 6.6%.

BBC Global 30 intraday chart


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