UNDER STRESS:Stress test results for Europe's banks are expected next week. Ironically, the tests can only succeed in restoring investor confidence if enough banks fail.
US investor sentiment turned positive in May 2009 after half the banks tested failed, forcing them to raise $76 billion soon afterwards.
British stress tests required all banks to raise money, with nearly £50 billion being demanded. The most recent Irish tests, UBS analysts noted last month, required “equity uplifts of 50 per cent or more”.
In contrast, European stress tests in 2010 gave pass ratings to 84 out of 91 banks tested. A capital raise of just €3.5 billion was recommended (the lowest analyst estimate is 10 times that figure).
The tests will be of “little value” if major Spanish lenders pass, UBS notes. Credit Suisse echoed that this week, saying Spanish banks alone probably required €10-12 billion. The stress tests could only work, Credit Suisse added, “by finding some banks in Europe to be in need of capital and then recapitalising them, precisely what was not done in 2010.”
BOUNCING BACK:We've noted recently that markets appeared poised to enjoy a decent technical bounce. It arrived last week as global markets soared and, says Citigroup strategist Tobias Levkovitch, more gains look likely.
His Panic/Euphoria Model, a composite of nine measures of investor sentiment, fell into panic territory as the market sold off. Despite the SP’s rebound, it remains there.
Statistically, Levkovitch says, there is a roughly 90 per cent probability markets are higher in six months and a 97 per cent probability in 12 months. Stocks typically gain by 8.9 per cent and 17.3 per cent over the respective periods, he says.
RETURNS WARNING:Benevolent bankers are everywhere these days, protesting that increased regulation of financial institutions will hurt the global recovery.
Barclays chairman Marcus Agius came up last week with another cause for concern – investors’ wellbeing. “Talk of bank investors being prepared to accept utility- type returns is completely unrealistic,” Agius warned.
Bruce Packard of London-based stockbroker Seymour Pierce countered that shareholders and pensions funds would likely have no problem with “utility-type returns for utility-type risks”. This week, he asked clients how they felt on the matter. Out of 10 respondents, only one agreed with Agius, three disagreed and six gave “nuanced” responses.
Hardly scientific, although Packard said the exercise was “worthwhile”, given the size of the institutions they asked. The reality, he suggested, was that bankers, not pension funds, were not prepared to accept such returns.
Utilities typically generate slow and steady returns as well as above-average dividends and appeal to cautious investors.
