IF CENTRAL bankers and politicians were puzzled by the speed and depth of the stock market gyrations last week, they could look in the mirror to find one of the causes.
As my colleague Ben Laurance explains on Focus, many western companies are highly sensitive to what goes on in China — particularly miners and oil producers. But the situation there is not a complete disaster: nobody thinks the country will lurch into recession, and even the gloomiest forecasts for growth this year are 4% — a rate well above what will be achieved in Britain and America. And this in an economy that has quintupled in size in dollar terms over the past decade and must take a pause at some stage.
The reaction to the slowdown was splenetic, however. The FTSE 100 lost 10% of its value in a week and nearly 5% in a single day (Monday) with the big US indexes following suit. Most of those losses were clawed back as Chinese markets staged a mild rally and America’s second-quarter growth figures came in better than expected.
One reason for the tantrums is that western stock markets have lost a key buffer — investment banks.
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Before the credit crisis, the banks were operating trading desks that played big with the banks’ own money. They were market makers on a grand scale, mopping up shares and playing any angle to generate a profit.
In the aftermath of the financial crisis, however, they were reviled as part of the “casino” mentality and rules have been changed to make them much more expensive to operate. The end result has been banks that have less risky operations and a market that has been robbed of an important source of liquidity that can check big swings.
Great sport at Bwin
THE scrap over Bwin.party, the gambling company behind Foxy Bingo, is turning into one of the best and oddest takeover battles of recent years.
A quick recap. GVC, a much smaller rival, made a bid approach at 110p a share in July, valuing Bwin at about £900m. The company behind Sportingbet, 888 Holdings, raced in to scupper the deal. GVC was unofficially the preferred bidder, but 888 knocked it off the ball. Bwin then recommended the 888 offer to shareholders, though it was on the face of it worth less: 105p a share. (Both sides are offering a mix of cash and their own shares, so there is room for subjectivity in valuing the bids.)
On Friday — just as the prospectus for the 888 takeover was published — GVC upped the ante by tabling an offer of 125½p a share, valuing Bwin at just over £1bn. That’s a hefty premium and, as we report today, there is a strong possibility that Bwin could switch horses this week and recommend GVC.
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That will leave 888 with an interesting question. Should it trump the price? Or, as it argues that its shares have better prospects than those of GVC, might it make a higher offer, but still be lower than its rival? It would be hard to see how the Bwin board, having gone for the higher price, could backtrack again. Then 888 could — thought it would be unusual — go hostile and give Bwin investors the choice.
I should stress there is no certainty Bwin will change sides. Still, it’s a great game to watch — faites vos jeux.
Big is no longer best
ONE of the maxims of retail banking is that size matters. If you have branches everywhere and the muscle to invest in customer apps and back-office technology, you have a big advantage.
Nobody thought to tell the fleet of challenger banks that have listed this year. The chart below shows how three of them have done — Shawbrook, OneSavings and Aldermore. They have all rewarded investors handsomely, and seem to have no problem finding customers and making decent profits, even if they lack the scale of larger rivals.
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Perhaps the old truths no longer hold. On Friday, HSBC customers found out that size didn’t protect if from an IT glitch, with thousands of payments held up just before a bank holiday weekend. Royal Bank of Scotland has struggled with its back office for the past two years, with too many embarrassing breakdowns. Perhaps size, scale — and age — are not an advantage when it comes to technology, increasingly the most important determinant of customer satisfaction in banking.
SABMiller should be scared
THE giant brewing company SABMiller has been having chats with Robey Warshaw, the tiny City advisory firm that has played a role in most of the big deals of the past year. Not an earth-shattering development in itself, but it adds to the widely held view that SAB is terrified of a bid landing on its doorstep, with AB InBev, its Belgian-listed rival, the most likely aggressor. SAB shares closed last week at 3,054p, having traded closer to 3,800p just a few months ago. It is right to be apprehensive.