As shares tumble, what will come next?by Giles Wilkes / June 28, 2016 / Leave a comment
Barclays: down 60p to £1.25. RBS, down 75p to £1.75. Lloyds down a similar percentage to nearly 50p. No one in the City thought that the UK’s banks were bullet-proof investments, but we were never expected to see these kinds of falls again. Institutions that were meant to be strong after years of regulator-driven rebuilding are crumbling. How can Brexit be so devastating to bank equity?
There are a few answers. First, a caveat that applies to every sharp move, particularly after unprecedented events: do not trust the market’s first or even second reaction. Insofar as markets are a machine for processing information and also sentiment—two very different qualities—they often misfire at times like these. The pound has hit a low of $1.31 since the vote, and you would be brave to gamble on it not dropping further. To some degree, fear replaces calculation at times like this.
But reasons to be fearful come in battalions. Banks are geared bets on the underlying economy and its asset markets. Those banks mentioned above have an unavoidable, large and leveraged exposure to UK property and the general ability of British households and businesses to service debt. Bad debts are bound to rise, even if interest rates remain low. The sale value of assets will be lower.
Prospects for new business are not great either. Even where credit is available, many people will hold back from big purchases or new ventures and see how things pan out. This waiting itself can bring about the weaker market that it fears….