With all the creaking of a medieval ox cart, our banking system continues to slowly bump and grind its way along the road to recession. Dragged along by a bunch of tired old dray horses seemingly fit for nothing other than to the knacker’s yard, they hardly seem to have the necessary energy to revive our economy. Although spruced up with dynamic branding to look like thoroughbreds (one advertising itself as a lean high speed train, another sponsoring a Formula 1 team, and one of course is supposed to be a shining black horse in any case), these tired beasts seem unable, or maybe are unwilling to react to any of the exhortations of the driver. So our banks lumber on. Figures show how little of the intended sums of financing seem to be filtering through to the economy, and thus every day that goes by they cause further pain and frustration in the financial structure of the country.  Last week the FT reported just a trickle coming from the banks faucet operating under the government’s loan guarantee scheme – out of a total £1bn facility, just £12m would seem has actually been lent out so far.

It seems that everyone is waiting for someone else to take the initiative, or maybe just hoping that things will come right again. A forlorn hope I suspect. Compare then this with the action being taken by the team led by Gary Hoffman at Northern Rock. Last week was the first anniversary of its nationalisation and thankfully away from the glare of public reporting.  They have been able to make some significant strides. From of a debt from the government of some £26bn (you may recall that this is the equivalent of our defence budget) they have succeeded in repaying some 60% back to the Treasury. Although causing some concern over some of their actions over foreclosures, this is certainly a considerable achievement.

In fact the issue now is whether the Rock will be allowed to be recapitalised in order to start lending again as a fit and proper mortgage provider.  This is quite a turnaround in just twelve months and I think shows what can be done when left to quietly restructure and rebuild. A lesson here for the other banks which my colleague Peter last week quite correctly referred to as the “zombie” banks.

Perhaps we can learn from the Lloyds of London Insurance debacle of the last decade. After the huge losses that were incurred, the future of that venerable London institution was seriously in doubt and frankly its reputation was in shreds. Yet, in just a few years, Lloyds is now seen as being very successful again both domestically and internationally, and its catastrophe has been consigned to history. How? Well, one key area was their focussing on good assets and then consigning the bad assets to Equitas as their equivalent of a manure bank. Equitas has been seen as a success with some of the poor structures there being turned around quite successfully over time, whilst the “good” areas were restructured and have gone on to be an effective and vibrant part of the City of London again. The key here is to focus on the good assets- not the bad assets, and get the good bank working again.

Government, Regulators and Bankers – look and learn.

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There is one area of the City of London that has rather quietly got busy again. The Corporate Finance departments seem to have been flooded suddenly with instructions to start raising new money. Yes this Spring’s fashion will be the “Crisis Rights Issue”.  Companies are beginning to queue up to put in their bids to refinance their balance sheets, some to pay down debt, others just to stock up on spare cash just in case.

However in markets where economic confidence is flat, such offers are going to have to be made extremely attractive to bring back risk money into the investment markets. This means that offers to potential investors are going to be at some astonishing discounts and could provide some tempting opportunities. The question will be though – will we believe what is being offered as being better longer term value?  After all cheap shares may not be good shares unless we can see some tangible growth further down the line. However I think we should regard this as a positive sign as we move to the next stage of the recession and we can measure just how much money on the sidelines can be drawn in. Private Equity friends of mine are still somewhat sanguine. Yes there is value – but not quite enough yet.

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Good news for one area of the UK economy. Here is one sector that is benefitting from a lower valued sterling, and seeing increased demand. As our GDP fell by 1.8% last year total income from this “hidden” sector increased by 36%. The often ignored world of farming is a significant contributor to our economy and is far more resilient in a slow down and more sustainable than our discretionary spending in the retail areas.

Although the record food commodity prices of last year have eased off somewhat, (however they are showing signs of picking up again) they, according to figures from the FT, seem to have provided a healthy fillip for the sector and with fuel and fertiliser costs coming down this year, then margins should also improve. Additionally, the lower value of sterling has not only made our farm goods far more competitive with exports of over £13bn last year , but also the much maligned agricultural subsidies that are received are priced in Euros have become even better value! Although farming is still only about 4-5% of our economy, it contributes some £80bn to the economy and employs 3.6m people. Not to be sniffed at and certainly not to be ignored in these constrained times.

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And finally….

You cannot accuse the Americans of not trying every avenue to get the economy going again. News comes that not only are they not content with just printing money in the form of notes and easy credit to banks; apparently they are updating the coinage too. The designs for the 1c coin have been updated, and $50m of new pennies are being minted. Unfortunately, as they are made of copper-plated zinc they each cost 1.4c to make. Doh!  Next idea please….

Have a good week,

Justin A. Urquhart Stewart

Director

Seven Investment Management Limited