Over the course of this week, all four of the UK’s quoted banks will report full-year results. The extent to which past misconduct, some of it dating back a decade or more, still overshadows the numbers never ceases to amaze me. Take HSBC, which reported on Tuesday. Its outgoing boss, Stuart Gulliver, said one of the reasons he missed his 10 per cent return on equity target (by a wide margin) is that he signed off a total of $15bn in misconduct penalties over his seven years in the proverbial corner office.
On Wednesday it was the turn of Lloyds. This was the bank that, in 2011, broke ranks with its peers by declining to appeal a High Court ruling over the mis-selling of payment protection insurance. Presumably, it thought the compensation bill might run to a few billions over the course of a few years. Seven years later, the total set aside by this one bank alone stands at almost £19bn, including another £600m provided for in the 2017 results. Amount paid to shareholders as dividends in the same period: less than a third of that sum.
Later in the week we get Barclays, still facing investigations over its post-crisis injections of cash from the Middle East, and Royal Bank of Scotland. The latter’s treatment of small business customers is still subject to parliamentary scrutiny, while the pending settlement with the US Department of Justice for mortgage-backed securities mis-selling hangs over it like the sword of Damocles. That relates to activity that took place before 2008. It will be charged to 2018 profits.
On a work trip to Germany last summer, I was repeatedly asked whether I thought the UK would change its mind over Brexit. I thought not, and on balance still think that today. This is partly because views are so entrenched on both sides. And partly because the main opposition in parliament here does not appear particularly interested in the various Brexit permutations. Its leaders are more focused on the remaking of the UK as a socialist economy.
The scope of their proposed interventions grows by the day. In a speech this week, leader Jeremy Corbyn suggested a Labour government would intervene to prevent GKN, an engineering group, being taken over by Melrose. His right-hand man, John McDonnell, hinted in an interview with the Financial Times that government contracts with private companies could be taken back without compensation. The never-ending discourse over Brexit means such prescriptions may not be getting the attention they should. It would be ironic if a country that has exported the notion of legal property rights around the world should end up trampling all over them at home.
This week saw the publication of the Global Investment Returns Yearbook by the Credit Suisse Research Institute and London Business School. The dry academic dissection of 118 years of data is a refreshing counterpoint to the short-term postulations of those with products to sell. Amid all the data and discussions, three points stood out for me.
One was that the Vix volatility index, on which we have all suddenly become experts, has virtually no predictive power at all. It merely tells you that equities are volatile. You already knew this. It is why you demand a risk premium to own them.
Another is the idea that interest rates are “abnormally low”. They are not. It is just that they were abnormally high in the decades immediately before the financial crisis. Real interest rates on US 10-year inflation-linked bonds have averaged 0.9 per cent since 1900. Worldwide, it is 0.4 per cent. Current rates are a lot closer to these averages than the 3.5 per cent prevailing at the start of the millennium.
Finally, the idea that housing has delivered equity-like returns with bond-like volatility came in for a roasting. Such naysaying is particularly heretical in the UK, where houses are widely seen as the solution to every financial problem just as leeches were once the cure for every malady. What struck me most about this discussion, though, was how facile the comparison between housing and stocks is. For me, homes are for living in. Stocks are investments.
Have a pleasant week,
Deputy head of Lex
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