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MONEY MARKETING MARKETS: Banks make hay while M&S may pay

The recent fine weather has been broadly mirrored in the markets with investors adopting a sunnier disposition this week.

The FTSE 100 is edging back towards the 6,000 barrier, after an early rally this week that saw three days of strong gains. Thursday’s pause for breath has not dented confidence with the FTSE up 0.46 per cent by midday Friday at 5,918.2.

Financials led much of the early gains amid growing hopes that the worst of the credit crunch is over, despite news of further writedowns by UBS.

“It has been an interesting week because the US market has been very strong and the UK has followed it,” says Paul Mumford, manager of the Cavendish UK Opportunities fund. “The banks have contributed to a large proportion of that gain yet the news out of the sector has not been particularly bright.”

Gary Reyonlds, chief investment officer at Courtiers, believes this is because there is a strong belief that the new senior executive teams at UBS, Citigroup and Merrill Lynch want to clear out all of the bad news as quickly as possible.

“There is a belief that UBS is being honest about its writedowns and once the losses are quantified, people can look forward,” he says. “We have had a lot of changes at the senior executive level and the new management teams will want to get the bad news out as quickly as possible because they do not have ownership of the problem.”

HBOS, Barclays, Royal Bank of Scotland and Lloyds TSB were among leading gainers in the first three days of the week with the likes of Legal & General, Old Mutual and Schroders also benefiting.

Reynolds says there is also a growing conviction that on an average p/e of 7.6 compared to the market’s p/e of 11 and a 7.3 per cent yield, banks are now pricing in all of the bad news.

“Before you get a turn you get capitulation and we have seen that with the banks,” Reynolds says. “They are now dramatically cheap and I think people are starting to recognise that.”

Mumford believes the sector has also had technical support this year from the imminent tax year end and changes to the capital gains tax regime.

He says: “There is evidence that there has been tax loss manoeuvring. With the new tax year starting next week and CGT coming down from 40 per cent to 18 per cent, some investors have been selling stock to gain relief at the higher rate.”

Much of the proceeds of these sales have been recycled back into the banking sector driving a lot of the volume, he says.

The banks didn’t have it quite all their own way this week with the FTSE enduring a 24.6 point sell-off on Thursday due to profit taking. Banks themselves stripped 23.9 points off the index, but moved back upwards on Friday despite disappointing US jobs data.

AstraZeneca also had a good week on news its cholesterol drug Crestor reduces heart problems while National Grid surged on news it had sold off its New York City power plant for close to £1.5bn.

Retailers had a rather mixed week. Halfords and Mothercare reported solid sales growth but Moss Bros slipped into the red- surely can’t be for the lack of financial services industry black tie dos?

But the row of the week award again goes to Marks & Spencer. Despite making concessions to shareholders about the proposed dual executive chairman/chief executive role for Sir Stuart Rose, the market remains scathing.

Mumford says: “I personally feel Sir Stuart has done a very good job but it would be much better to bring in a credible interim chairman than have him step up to take both roles.”

The concession would see Rose receiving no pay rise and having to be re-elected annually and the company reverting to an independent chairman in 2011.
“Why 2011 and why not now?” demands Reynolds. “Rose is clearly refusing to work under a new chairman and no man is bigger than the company. This safety mechanism is essential to good governance and I am simply staggered that he is able to have that level of influence at a company like M&S.”

With Schroders and L&G also deeply critical of the move it will be interesting to see how many fund managers stick to their guns and sell off their holdings if M&S does force through the plan, as looks most likely.


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