HSBC is our share tip of the week - 5 reasons to invest (Video)

IBTimes Video Link Below:

HSBC is our share tip of the week - 5 reasons to invest

Bloomberg TV interview (Video): Why I like eurozone banks for Q4, even Deutsche Bank!

Bloomberg web link to Video below:

Bloomberg TV interview (Video): Why I like eurozone banks for Q4, even Deutsche Bank!

HSBC and Co-op Bank do battle as sub-1% mortgage wars break out

International Business Times Video Link below:

Edmund Shing: HSBC and Co-op Bank do battle as
sub-1% mortgage wars break out

Could the first sub-1% mortgage rate be around the corner? Actually, it is already here. While the Co-op Bank recently launched a 1.09% two-year fixed-rate mortgage (which will move back to the standard variable rate (SVR) at the end of the term), HSBC has beaten this with an initial rate of 0.99% on its two-year discount special mortgage.

It is hardly surprising then that existing homeowners are thinking about remortgaging to lower their monthly mortgage payments. Surprisingly enough, the SVR on mortgages has actually risen since 2010 and now stands at 4.5%.

Figure 1. Two and five-year fixed mortgage rates still falling 

Source: Bank of England

The average two-year fixed mortgage rate has fallen to under 2%, while the average five-year fixed rate is under 3% (Figure 1). And if you shop around, you can now find sub-2% five-year fixed rates too.

Nearly one in six homeowners are thinking about remortgaging over the next six months, according to a recent Nottingham Building Society survey.

They are hoping to save on average £99 per month, or nearly £1,200 per year. This is all thanks to the ongoing mortgage price war, driving rates ever lower. Let's face it, with the Bank of England base rate at a historic 0.5% low, interest rates are likely to only go one way in the long-term – up.

So remortgaging with a multi-year fixed rate will at least insulate the homeowner against the risk of higher rates for the foreseeable future.

Average mortgage rate on outstanding mortgages

But how much is the average mortgage borrower paying at the moment? The Bank of England says "nearly 3.2%" (Figure 2).

Yes, this average rate has come down over the past five years, but it is still a long way from the current best two and five-year fixed and discount rates on offer today.

Figure 2. Average mortgage rate on outstanding mortgages still over 3%

Source: Bank of England

Let's say you are interested in remortgaging your house or flat. Where would you start and what should you watch out for?

Firstly, you can go the well-trodden route of checking out the online mortgage best buy tables at MoneySuperMarket.com, MoneySavingExpert.com or MoneyFacts.

Before going any further, it is probably a good idea to sit down with your existing mortgage provider to see what they can offer you.

Then if you're not satisfied, try the banks and building societies at the top of these tables. Or you could go to a specialist mortgage broker such as John Charcol or London & Country Mortgages.

But beware, some of these lowest interest rates come with catches: you may be hit with a high "arrangement fee" that can go as high as £1,499, or there may be penalties for early repayment. So be careful to examine the details.

Investing in the mortgage market: challenger banks, specialist lenders

There are some interesting ways to invest in a post-election pick-up in mortgage demand. Instead of looking at the Big Four UK banks, I would look to the new "challenger" banks that have recently been established, or look to specialist mortgage lenders.

Listed challenger banks that are making a splash on the savings and loans markets include Virgin Money (code VM.), Secure Trust Bank (STB), OneSavings Bank (OSB) or Aldermore Group (ALD).

Virgin, OneSavings and Aldermore have all recently listed on the London Stock Exchange and are growing their savings and mortgage businesses quickly as they take business away from the Big Four.

Otherwise, for a really focused mortgage growth play, you could look at the Paragon Group of Companies (code PAG). Paragon specialises in residential mortgages (such as buy-to-let), personal and car loans.

They are forecast to grow profits by more than 10% per year for the next two years and trade on a very reasonable valuation.

Bottom line: if you haven't remortgaged already recently, check out the current best remortgage buys and see if you can save on your monthly payments.

Bloomberg TV June 6, 2014: Draghi's actions were aimed squarely at helping the Euro economy

From my Bloomberg TV interview this morning, here are two videos to watch (just click on the links below):

• ECB President Mario Draghi's actions were aimed at boosting the limp Euro economy
  Draghi-s-actions-were-more-for-the-economy-shing

• French bank BNP-Paribas (one of my former employers!) and the US - will they have to pay $10bn in fines?
  Top-banking-regulator-to-seek-bnp-dismissals

All the best for the weekend,

Edmund

Bail on your bank shares! Buy insurance, real estate instead

Look at the widening gap between financial sectors

I think this first chart gives you a good idea of why I am not keen on UK-listed banks at the moment – the stock market has been falling out of love with them over the last 10 months, following a series of frankly poor results (Figure 1).

If you had been invested in the UK Banks sector (HSBC, Barclays, Lloyds TSB, RBS, Standard Chartered) since January of last year, you would today have seen precisely zero price appreciation on average to today – your only gain has been in dividends paid.

Contrast this with the stellar performance of two other UK financial sectors: Insurance and Real Estate, both of which have gained around 30% over the same period. That is a big difference!

 But there are of course some very good reasons for the relative under-performance of Banks – most notably from:

1. Their poor sets of results, generally missing analysts’ estimates for profits and earnings;
2. The ongoing sagas of tighter banking industry regulation and also continual provisions for the costs of various mis-selling and price-fixing scandals, which seem to linger like a bad food odour and taint the industry.

Banking scandals do not go away

I haven’t got enough space in this short article to list all the “bad stuff” that the banks have been caught doing over the past few years – just note that we now have a potential Gold price scandal centred around the daily London pm gold price fix, which involves Barclays and HSBC amongst others.  So this latest scandal can potentially be added to the long list of issues that the banks are already paying for, in the form of fines and compensation to victims.

And bank results have not been good

On the results front, these have been somewhat disappointing; even today Standard Chartered has announced results, another bank undershooting analysts’ profit forecasts for end-2013 (net income reported of $3.99bn versus an average analyst estimate of $4.25bn).

UK banks, particularly those like Barclays, HSBC and RBS that still retain substantial investment banking activities are struggling to bring down costs (principally salaries) sufficiently to reach their targeted cost-income ratios (a measure of banking efficiency). Put simply, if they do not pay high salaries and bonuses to investment bankers who are performing well, these employees will simply jump ship and work elsewhere. And an investment bank is really the sum of its talented individuals – if they all leave, what value is left?

To read the rest of this article, see the charts and my UK large-cap stock recommendations in Financial sectors, click on the link below:

Bail on your bank shares! Buy insurance, real estate instead

Buy Europe! The ECB will have to give the Euro economy a boost

Why you should buy Europe now, before the ECB acts

Yes, I know that you may be hesitant to buy Continental European stock market exposure, given the travails of the Euro zone since 2008. And you would be right to object that the Euro zone sovereign crisis has by no means been definitively solved, with debt loads of countries such as Portugal, Spain and Italy still pretty enormous.

This is all true and I wouldn’t dream of denying any of these facts. But hey, if you are to look at sovereign debt mountains, then you wouldn’t invest a single penny in the US, Japan or the dear old UK! The final exit from the sovereign debt mountains amassed both before and during the last financial crisis will take a very long time for the respective governments to unwind, as noted by the economists Rogoff and Reinhardt in their seminal tome “This Time is Different” (although there have been some subsequent issues raised concerning their calculations).

What I would argue is that there are a number of green shoots poking through for the Euro zone economy, which should be a harbinger of better days ahead. Added to this, I am a firm believer that the European Central Bank (the ECB for short) will need to stimulate the Euro zone further in the months ahead, which should be unabashed good news for the European stock market. And you have a chance today to buy into relatively cheap European stocks before the ECB unleashes one of their economy-boosting “big bazookas”.

Euro Confidence Is On the Up

Whether you look at leading economic indicators or  economic sentiment indices like the Sentix economic confidence index highlighted below (Figure 1),  the improving macro trend is clear...

Please click on the MindfulMoney website link below to read the entire article, see the charts and also the ETF and investment trust suggestions at the end:

Buy-europe-the-ecb-will-have-to-give-the-euro-economy-a-boost

All the best,
Edmund

CNBC TV Guest Host! Why I still prefer Insurance to Banks...

Yes, I was once again Guest Host on CNBC Europe's Squawkbox show from 7 to 9am. Thanks to the London Tube strike, I had to get up at 5am to get a car to the studio at 5:30am! 

We discussed a whole slew of company results, including some of my favourite stocks such as Alcatel-Lucent (restructuring and seeing the benefits in better gross profit margins) and AstraZeneca (which every analyst has loved to hate because of its upcoming drug patent expiries like the statin Crestor). 

I was asked what I thought about European Banks in the wake of the announcement of Credit Suisse's results - I maintained that I still prefer Insurance companies to Banks. To find out why, please click on the CNBC TV web link below to watch the video:

Edmund on CNBC - Prefer Insurance to Banks

While today's Bank of England interest rate announcement should be uneventful, this afternoon's European Central Bank (ECB) announcement could be more interesting, as there is a good argument for the ECB to add further stimulus to help economic growth in the Eurozone. So far, while German manufacturing is picking up nicely, France is lagging badly behind (not helped by President Hollande's antics). 

The Eurozone still needs all the help it can get, so here's hoping that President Draghi does something!

Edmund

On Sky News' Jeff Randall programme (27/01/2014), re RBS loss

RBS's trading statement last night (27 Jan 2014) was a real shocker, confirming yet again that European banks (like US banks) are not yet out of the post-crisis maelstrom that has repeatedly engulfed them. For my part, I appeared on the Jeff Randall show on Sky News to discuss this unexpected additional collection of revelations, which will drive RBS to a massive loss for 2013 overall. 

A Banking Tale of Woe

Let's have a quick recap of all the various scandals that banks have been involved in of late:

1.  PPI insurance mis-selling;
2.  Credit card theft insurance mis-selling;
3.  Mis-selling of interest rate hedging products;
4.  Mortgage-Backed Securities misrepresentation (adequate disclosure not given);
5.  LIBOR interest rate fixing;
6.  Foreign Exchange rate fixing;
7.  Inability to apply current Money Laundering regulations in Mexico;

Actually, I have probably forgotten one or two more, as there have been so many... I haven't even included the latest statement from the German banking regulator BAFIN, who believe that investment banks have also been involved in rigging precious metals prices...

FULL DISCLOSURE at this point: I have in the past worked for Barclays Capital, one of the banks involved in these various issues. 

This gives local and EU-wide banking regulators yet another stick to beat the banks with, similar to JPMorgan's experience Stateside. 

Stick with UK Insurers

Given the choice, I would stick with my preference for Insurance stocks over Bank stocks any day, particularly in the UK. Banks still have to fully comply with Basel III capital requirements, not to mention increasingly tough regulatory scrutiny from local banking regulators. 

UK Insurers Beat Banks Hands Down!

My favourite UK insurers include the closed fund life assurance companies Phoenix (PHNX), Resolution (RSL) and Chesnara (CSN), all of which remain cheap on price/book and price/embedded value ratios, and all of which offer bumper dividend yields of 5.5% to 8%.

Dividend funds: caveat emptor!

Market Indicators Remain Positive

With the US S&P 500 stock index hitting new highs, we might ask ourselves if shares are finally starting to become expensive, and vulnerable to a near-term correction. Checking a number of my favourite market indicators, conditions look to remain favourable for stocks and shares. 

1. US advance-decline indicator hits new highs

The cumulative advance-decline indicator, that measures how many stocks have gone up versus those that have gone down each day and adds the up-down balance up over time, continues to make new highs. This points to good market breadth, i.e. that the market is being driven by a large number of stocks rising. If this were not to reflect a similar pattern to that for the benchmark stock indices, then I would be concerned. But no worries here...

US Advance-Decline Index Remains very Bullish

 2. US Value Line Geometric Index Also Very Strong

A second measure of market breadth is the Value Line index, which looks at the performance of the average stock in the US. Again, if this were not to be making new highs at the same time as the benchmark stock indices, I would be concerned. But once again, things look good...

US Value Line Index Also In A Bull Trend

3. European Industrial, Bank Stocks Still Performing Well

In an economic recovery scenario, both industrial and financial stocks should perform well, reflecting the benefit of a stronger underlying economy for profits in both these cyclical sectors. Looking below, we can see that European Industrial (SXNP) and Bank (SX7P) sectors are still in strong uptrends, and close to new highs. 

European Industrials, Banks Close to New Highs

But High Quality Dividend Stocks Now Expensive In the US

Interestingly, stable dividend stocks have in particular started to become expensive as investors have looked for yields outside of the traditional bonds and cash sources, given the very low rates of interest currently on offer from both asset classes. 

US Dividend Aristocrat Dividend Yield at record low

The chart above represents the US dividend aristocrat ETF, which only holds US large-cap companies that have raised their annual dividend consistently each year over the last 25+ years. Members include healthcare companies like Johnson & Johnson, and consumer staple companies like Coca-Cola.  All very high quality companies, but now increasingly expensive, only offering a 1.8% dividend yield now as opposed to nearly 2.5% at mid-year. Clearly investors are looking for a better yield than they can get on bonds or cash, but without taking big risks and thus preferring to invest in companies that offer relative stability. 

Focus more on Small-Cap stocks

October has been a pretty good month for Small-Cap stocks, with both UK and US small-cap indices continuing to outperform the large-cap benchmarks and rising in a strong, steady pattern. Both small-cap indices have gained nearly 5% over the last month, continuing to forge new all-time highs. 

UK, US Small-Cap Indices In Steady Uptrend

Favour Industrials, Small-caps; Beware Overvalued Dividends

I remain a big fan of ETFs exposed to small-cap stocks such as the iShares MSCI UK Small-Cap ETF (CUKS) and the iShares S&P Small-Cap 600 ETF (ISP6). You could get exposure to Small-Cap stocks in Europe overall via the db x-trackers MSCI Europe Small-Cap ETF (XXSC). With capital expenditure trends improving, European Industrials also remain a good area for investment at this moment: db x-trackers STOXX 600 Industrial Goods ETF (XSNR). 

But I would be wary of continuing to chase large-cap dividend stocks and indices higher at this point, as many of these stable growth stocks are now sitting at relatively expensive valuations, particularly in the US.  

If you want to buy exposure to European dividends, it would perhaps be better to look at a high-yielding sector ETF that is performing well, such as the STOXX Europe Telecoms ETF (offered by db x-trackers, Lyxor amongst others) rather than chasing what seems to me to be expensive dividend growth, at this point.  

Banks Breaking Higher In Spite of US Political Roadblocks

Given the drag to US economic activity from the ongoing US government shutdown, and the looming need to raise the US debt ceiling (before the US government runs out of money!), I am surprised to see that US investment banks and broker-dealers continue to do very well, with hardly a pullback in sight. 

US Broker-Dealers Bounce off 3m Moving Average

Boosted by Retail Investors Buying Stock Funds

This particular index comprises investment banks such as Goldman Sachs and Morgan Stanley, stock and commodity exchanges such as the CME, ICE and NYSE Euronext, and electronic trading platforms with as TD Ameritrade and E*Trade. They are all clearly benefiting from the current bull market in stocks, and the swtch by retail investors away from bond funds back towards equity funds, e.g. in the form of buying equity ETFs. 

Money Still Flowing Into Equity ETFs

European Financials Lead the Stock Market

In Europe, the same trends can be seen, with both the European Banks and Insurance sectors at or breaking new highs:

European Banks break a new year high

European Insurers also hitting a new high

You might argue that financial markets are perhaps being a little too sanguine over the risk of a US government debt default; the accepted consensus seems to be that a US default would wreak complete havoc on the US and global economies (not to mention global financial markets), and thus will be avoided by a combination of the US Treasury and Federal Reserve at all costs. 

Nevertheless, the fact remains that volatility remains historically low in spite of the political deadlock, and investors are still stuck looking for somewhere to invest their savings where they can garner a half-decent return, which is still leading them back to stocks and shares. 

Implied Volatility Still Close to Multi-Year Lows

Personal caution

I personally would rather be a seller into this rally than a buyer, as I believe that any eventual debt ceiling deal in the US could result in the stock market cooling off, as it is often better to "buy on the rumour, but sell on the news". 

That said, the US and European Banks and Insurance sectors still contain many companies that look attractively valued when looking at P/E, dividend yield or price/book valuation metrics, at a time when the US stock market overall could be argued to be already fully valued (as was argued recently by the famed investor Julian Robertson in a recent CNBC TV interview: Julian Robertson interview).

So what to do? I am still heavily invested in the UK, European, US and Japanese stock markets for now, but I must admit, I am looking to sell down positions sooner rather than later. After all, we are still not even halfway through the month of October, which has proven a pretty volatile month for stock markets in the past (see previous post for details)...

So invest in banks and insurers if you are confident of a successful resolution to the US debt ceiling issue, and if you believe that upcoming quarterly earnings releases from giant US banks such as JP Morgan and Wells Fargo will not disappoint expectations. 

Good luck,

Edmund