Banks and builders: invest or avoid?

Banks and houses are inextricably bound up in the current credit crisis, proving to be both instigators of the situation and now preventers of a return in financial confidence.

House prices continue to fall, while banks continue to refuse loans (except at onerous rates) against a backdrop of continued rumour and speculation over the plight of one or another financial institution pondering a rights issue.

Gloom and doom abounds.

The crumbling house market has wiped the smile off property developers and builders while banks struggle to preserve profit and liquidity ratios. Is this, then, a good time to invest in banks and builders or should you resolutely steer clear of bombed-out stocks that conceivably still haven't finished falling?

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Setbacks for some

Your degree of optimism and course of action will be tempered by the wave of generally bad news that has engulfed financial institutions since the Northern Rock shambles last year. Many household names, such as HBOS, Alliance & Leicester, RBS and Bradford & Bingley, have suffered real or imagined setbacks.

B&B hit problems with its money making scheme and had to lower the offer price after its shares plunged. Shares in RBS, HSBC and HBOS have fluctuated because of criticism of their plans to raise money through rights issues.

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Barclays, the latest to join the fundraising queue, has faired better; its shares rose 5% yesterday following news of the bail-out by Qatar sovereign wealth funds. The slowdown in economic growth coupled with rising inflation doesn't play well for the immediate future and the borrowing crisis which started the fall in bank shares has still not run its course.

It could get worse

Last week the Royal Bank of Scotland (RBS) advised clients to prepare for a major crash in global stock and credit market over the next three months as inflation paralyses the major central banks. This prompted rejoinders from fund managers criticising RBS as "alarmist" and "any parallels with the 1920s stock market crash are gaga."

The general view amongst fund managers was that the RBS analyst (Bob Janjuah) was about year and a half late with his forecast.

Schroder's Richard Buxton noted: "If you strip out stocks related to oil, energy and mining in the FTSE you will see that the market is already down by 30% over the past year." He pointed out that many UK shares have fallen between 50% and 80% over the year already and it is too late for investors who have yet to protect their portfolios.

Martin Walker, fund manager at Invesco Perpetual was reported as saying the market has de-rated to such an extent that he couldn't envisage it falling much further.

Protecting your capital

In the case of B&B, say, probably not right now, better to wait a few years for an improvement in the market. Barclays, though, has potential; its shares are still cheap, having halved over the past 12 months. Also, its dividend yield at 10% is better than the average 5.5% yield for the FTSE banking sector. But if you don't want to lose a penny of your original outlay on bank stock, then the structured product route to market could be the answer.

The recently launched Selected UK Banking Plan (James Hay, part of Santander) claims to offer 100% capital protection at maturity and is linked to the performance of HSBC, Lloyds TSB, Barclays and RBS. There's the possibility for early maturity at the end of four years of the maximum five-year term; minimum investment is £10,000.

26 June 2008 © Moneyextra.com

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