Sunday 16 October 2011

Protests

Today there are protests in many countries although the message isn't 100% clear. The two main issues seem to be corporate greed and government spending cuts. The mainstream media and the vocal majority seem to think that this is where the problems lie although they don't seem to have any reasonable solutions or understanding of the subtleties of the situation.

Firstly corporate greed - the vocal majority would prefer to live in a world where corporate profits are distributed to the poor and needy. Whilst this might seem fair it goes against capitalism as well common sense. Companies must seek to be profitable otherwise they won't attract investors and won't exist. Companies must act in the interests of their shareholders.

So what about Governments? Our Governments are given te responsibility of managing the public interest and therefore raise money through taxation and spend this money for our benefit. They, at least in theory, have the ability to improve the current economic situation. However many seem to miss the subtleties of their actions. For example most are calling for heavy taxes or company profits and high earners to raise money and prevent the austerity measures. However companies and individuals can often move countries to lower their tax burden - as noted in a previous post where Wolseley's move to Switzerland cost the UK over £20m in tax revenue. The Government's job is very difficult and the only long term solution is to try to encourage growth and job creation in the private sector. Public sector jobs are important but shouldn't be created just for the sake of the employment figures as it is public money paying those salaries.

Saturday 8 October 2011

It's all on the Timing

As markets continue to be nervous and downgrades of both banks and countries sweep across Europe you might be thinking I'd be changing my mind regarding my positive medium / long term outlook. This goes to show why timing is so difficult and why a short term strategy can fail.

The reality is that it's very difficult to pick the bottom and top of markets. Many industry experts were calling the top of the UK property market as early as 2005 / 2006 but it rallied well beyond then. However if you take a longer term view, short term fluctuations are only loses on paper, and might even be opportunities to invest further.

My strategy of buying what I believe to be good value stocks as I wrote about a few weeks ago is continuing and my outlook remains the same. Anything short of total Eurozone meltdown is not a problem and non of Europe's leaders can afford to let that happen. Short term traders trading of margin may have gotten their fingers burnt with this volatility, especially if they've been trying to call tops and bottoms. Taking a longer term view actually gives you a much wider window of timing which even the most respected traders and hedge fund managers rely on.

Wednesday 5 October 2011

Introduction to Credit Rating Agencies

There has been a lot of press over the last fee months about countries being downgraded by credit rating agencies. The US made the headlines over the summer and more recently Italy has had it's economy both formally downgraded and generally ridiculed. Despite this many still aren't too sure what credit rating agencies really are, what they do and what the implications are of these downgrades.

What are credit rating agencies? The big 3 agencies are Standard & Poor's, Moody's and Fitch and they are widely regarded as credible and independent in assessing credit worthiness of large-scale borrowers. These borrowers being large corporations, banks and countries who typically borrow by issuing bonds. The agencies assign credit scores to enable investors (lenders) to quickly assess the risk of purchasing various bonds.

Why does it matter if a country is downgraded? As with consumer credit the lower tour credit rating the more costly your borrowing and the more difficult it is to raise money. The implications for countries, particularly certain ones in Europe, are potentially very damaging. Rating downgrades mean the government bonds have to carry a higher yield to attract investors and are therefore more expensive to repay. Countries like Italy, who already have significant debts and little or no economic growth to help manage repayments, could experience long term economic problems as a result.

Are credit ratings agencies ever wrong? The short answer is yes - most recently the subprime mortgage crisis was in part blamed on the agencies for giving financial products far too high a rating when the underlying security was actually very high risk and carried a high chance of default. Bankers took the brunt of the wrath from the press but the credit rating agencies were equally at fault.

Tuesday 4 October 2011

Taxing Times

Over the last few years the public cry, largely driven by an uninformed press, has been for new higher levels of tax for companies and in particular for high earning individuals (in the UK at least). In theory this generates a lot more income to help the government reduce the deficit. It would also in theory bash the banker's bonus which seems to be to top priority for the mainstream media.

The problem with onerous tax levels is that it is anti business and talented / high earning employees will simply leave the country. They are a mobile workforce and typically work in financial jobs in London which could be replicated in other global financial sectors. I personally know several brokers and bankers who have already made the move - most seem to be heading to Zurich or Singapore. Interestingly they say one issue for the move is tax but another reason is the public sentiment over high earners at the moment. Even if their job was completely unrelated to the financial crisis they are still being branded with the same 'banker' label which is now considered a derogatory term. It's not only people that are moving - last year Wolseley, a large building company, took their HQ and £391m profit to Switzerland. The UK missed out on a £23m tax bill as a result.

The UK needs to remain pro business and encourage high earners to excel. The top5% already pay 25% of the UK's income tax. High earners should definitely pay more tax but anything beyond the current level would be counterproductive and the 50p bracket should be reversed soon before too much damage is done. There also needs to be a sentiment change - companies are generally speaking efficient and wouldn't pay big bonuses unless the person receiving that bonus was worth considerably more. There tax bills are already larger than most people's paychecks so just think of what can be done with the tax they generate.

Saturday 1 October 2011

Businesses can't Bank on it

Despite some of the PR banks have managed to get out there about supporting small business the reality is very different. I've worked with many SMEs in helping them raise capital and seen how the reality of getting a business loan, even for established companies with strong cash flow, is as hard as it's even been. The FT today reported that loans to SMEs has fallen significantly again; I'm also keen for more to be revealed about the criteria for these loans as even those that are being approved are not really company loans. They are in fact asset backed loans as currently banks will nearly always want to see their loans 100% by tangling assets. Often these assets are personal assets of the directors and not even company assets.

Most SME don't have big balance sheets with lots of assets and apply for loans on the basis that the projected cash flows (supported by orders and / or historic cash flow) demonstrate repayment of the loan. However to get a business loan approved these days you'll typically have to personal guarantees supported by a personal asset and liabilities statement and have a net asset position large enough to cover 100% of the loan. This typically means putting the family home on the line and defeats the purposes of setting up a limited liability company in the first place. Also should this really be classed as a business loan?

Entrepreneurs in the UK have always formed an essential part of the economy, creating value, employing people and paying taxes. Without support from the financial sector the economy will struggle to recover.