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Money Marketing Markets: ‘Banks, bookies and beer’

The FTSE looks set to end the week strongly after a turbulent five days dominated by the news of Royal Bank of Scotland’s record-breaking £12bn rights issue.

RBS chief Sir Fred Goodwin managed to get through Wednesday’s AGM virtually unscathed despite the dilutive effect the rights issue will have on its 14,000 small shareholders’ stock. Many observers had expected the board to receive a barrage of criticism, not least for denying the need for a rights issue as recently as last month.

“I’m surprised because if I was a shareholder I would be very angry,” says Nick Clay, manager of the Newton managed fund. “RBS bought ABN Amro at the top of the market and then was in denial about the credit crunch, increasing the dividend when it was painfully obvious that things were going sour. Then they launch the biggest rights issue ever- how can that be the actions of an effective management team.”

Maybe RBS still has that job for life ethos, because demands for Goodwin’s head have been few and far between, despite the mass boardroom clearouts witnessed across the pond.

Clay also questions whether £12bn will be sufficient as RBS has not materially cut its £3bn annual dividend bill although shareholders will receive less because of the dilution of their holdings.

“They are running the bank arrogantly and still remain in denial about how bad the crisis is becoming and it is not beyond the bounds of possibility that they will need a second rights issue in 12-18 months,” Clay adds.

Jonathan Fieldsend, manager of the EEA UK equity fund, is a little more forgiving, noting that the rights issue brings RBS’ tier one capital ratio up over 6 per cent.

“Under normal circumstances this should be enough if they stick to conservative lending practices and avoid investing in things with three letter acronyms,” he says.

The fact that the average European bank is up to 8 per cent and in the US 10 per cent, is, however, bound to leave investors querying whether RBS has done enough.

Rumours have been flying around about who might be next with Barclays, HBOS, Alliance & Leicester and Bradford & Bingley all names in the frame.
Barclays ducked the issue at its AGM yesterday and refused to disclose whether further write-downs are imminent.

“Barclays’ statement was almost like a narrative,” Fieldsend says. “We expected something much more factual.”

It has a tier one capital ratio of 5.25 per cent, making it a prime candidate for a rights issue. Fieldsend says if there are further rights issues it begs the question of what impact will this have on the wider economy as money is sucked in to fund them.

Both RBS and Barclays took a pummelling all week until Friday’s rally, which sees the pair ending the week down 10 per cent and 8 per cent, respectively.
Clay believes the banks’ denials about the scale of the cries flies in the face of the mounting evidence of an economic slowdown.

He points to Persimmon, the UK’s largest housebuilder, as an example. On Thursday, it announced it was stopping building new houses, effectively meaning it was stopping business.

“Persimmon said the situation has deteriorated markedly since the end of March and there has been a massive increase in the number of people pulling out of house purchases,” Clay says.

The stock was punished heavily as its earnings forecasts were halved for 2008 and cut by 30 per cent even as far out as 2010.

Fieldsend believes the outlook for housebuilders and the banks could worsen in the summer when the year-on-year house price figures are likely to show a 4-5 per cent fall.

Further evidence of a consumer slowdown came from Punch Taverns, which echoed Persimmon, saying that the going has got very tough in April.

Beer sales are down 12 per cent and around 17 per cent of its pubs are effectively up for sale because the landlord tenants cannot afford to keep them going.

“It is a very nasty backdrop for Punch Taverns, which is a highly geared business. The number of pubs being granted rental concessions is also up materially and if we have a long and drawn out recession they will face problems,” Clay says.

A couple of consumer-facing stocks bucked the negative trend this week.

Primark, owned by Associated British Foods, announced profits up 22 per cent and bookies William Hill saw its take rise 5 per cent in the last 16 weeks.

Fieldsend says: “William Hill is a very cash generative business and is in an area we are interested in. Regulation is always an issue but they seem to have made a success of gaming machines.”

With further interest rate cuts seemingly off the menu, following the Bank of England revealing the split vote on its last rate cut, the pain for consumers looks set to continue.

Elsewhere, it was another strong week for the miners, barring a bout of profit taking on Thursday following a strong three day run.

Drug giant GlaxoSmithKline also fared well with its £361m acquisition of US company Sirtris Pharmaceuticals well received. Shire was boosted by a drug approval, although AstraZeneca was punished despite revealing a 12 per cent profit hike, as sales of several of its blockbuster drugs still disappointed.

All in all, by early afternoon trading on Friday, the FTSE was at 6,061, after starting the week at 6056.5, so another seemingly flat week that masks a lot of winners and losers.


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