Markets Live: Tuesday, 29th January, 2013 This is the transcript of the Markets Live session ending at 12:03 on 29 Jan 2013. AV's daily markets chat With Bryce and myself Bit of media navel gazing to day in terms of our portrait.... That's Damien Reece, Head of Business for the Telegraph Media Group. Formerly the Telegraph's head of business or City Editor in old parlance Iced yesterday, rather suddenly. Told it was a string of factors. Series of departures from his team Then there was the Stemcore affair Margaret Hodge's family company pays just 0.01pc tax on £2.1bn of business generated in the UK Margaret Hodge, chairman of the Public Accounts Committee, is facing embarrassing revelations over the tax affairs of her family company just days before she is due to lead the grilling of US companies over controversial tax arrangements. Which was followed by this: Margaret Hodge MP - apology Margaret Hodge MP - Contrary to our report "Hodge faces challenge over family firm's taxes" (Nov 20), Stemcor, in which Ms Hodge has a small shareholding, has not abused transfer pricing to avoid tax. We accept that there is no inconsistency or hypocrisy in Ms Hodge criticising other companies for tax avoidance and apologise to her for any contrary impression. Damien was blamed for that And then there was something else which I haven't quite got to the bottom of. Something about a firm the telegraph was partnering with - and Damien's relationship with the firm. But that's unconfirmed - no detail and I'm sure it is 100% innocent. But Damien has been iced Called in to the editors office at 3pm and not seen again. So we should now all wish Damien good luck in his new career in PR and move on... Okay - we should move on. yes, but just one tidbit.. New head of business is the deputy editor of the Sunday Tel - Tim Jotischky. Last job - head of sport at the Daily Mail. Okay - let's get the scores over with. Down day for the FTSE Off 2 points at 6291. Been as high as 6308 in early doors. Best January for two decades or so, according to my data. You know that chartist stuff about rising price and falling volume? Weakening trend or somesuch? (Chart from Bloomberg. Fair dealing activated. Please don't phone.) Green line's the FTSE over the past year. Purple line's the 90 day moving average volume of FTSE 100 stocks over all markets, not just LSE. Basically, volume (on a 90d MA) is down nearly 40% over the past year. We're now averaging below 1bn blue chips traded per day. Been in steady decline forever, but it now looks terminal. Anyway, I note it in passing And amid some curiosity as to where these record fund flows into equities are actually going. Capt B Mannering - yes it does (Yup - that's consolidated data. UKXVOLC, for those with a Borg machine.) (Which is worth every penny of the whatever it costs per month. Anyway, let's shove on to what's actually moving today. Yeah, Bramson has turned up on the shareholder list. A fact that he announced himself, apparently unilaterally. A very odd statement The Board would like to bring to the attention of 3i Group plc ("3i") shareholders its understanding that Sherborne Investors through its associates (together, "Sherborne") and Jefferies International (Nominees) Limited ("Jefferies") have been trading in 3i shares during January. We understand that trading commenced on 2 January 2013, and in a number of instances, we believe that Sherborne has acquired and then sold 3i shares to Jefferies. We believe that as at close of business on 15 January 2013, Sherborne had acquired an interest representing approximately 0.7% of 3i's total issued share capital, and has since sold that interest to Jefferies. In addition, since then, we believe that Jefferies has acquired further 3i shares, and that, as at close of business on 22 January 2013, Jefferies owned approximately 1.6% of 3i's total issued share capital. In the period from 2 January to 22 January 2013, the volume weighted average price of 3i shares was approximately 239 pence per share. As at close of business on 28 January 2013, 3i's share price was 258.9 pence per share. The Board notes that in November 2012, an investment vehicle, Sherborne Investors (Guernsey) B Limited, which is managed by Sherborne Investors Management (Guernsey) LLC, raised gross proceeds of £207m with the stated objective of investing in a company which is publicly quoted, most likely on a UK stock exchange, and which it considers to be undervalued. The Board also notes the comments in a Financial Times article on 3 January 2013 in relation to this new investment vehicle, stating that "Most of the £200m raised will be used to buy up to 30 per cent of one target." Jefferies International Limited is nominated adviser and broker to Sherborne Investors (Guernsey) B Limited. Bramson of F&C fame Yup - effected a nil-premium takeover there. Ousted the chairman and installed himself And, to be fair, has pushed them higher since. Partly on his own stake building, admittedly. Edward Bramson Executive Chairman Mr Bramson joined the Board and was appointed Chairman in February 2011 and became Executive Chairman in October 2011. He co-founded New York based Hillside Capital, a specialist private equity firm in 1977 and Sherborne Investors, which is involved in both private and publicly listed investments, in 1986. Mr. Bramson has previously served as Chairman of Nautilus Inc, Spirent Communications plc, Elementis plc, 4imprint Group plc and Ampex Corporation. He is currently a partner of Sherborne Investors let me get a pic of the chap He also got lucky with F&C on contract renewals, which was always a binary outcome. (@yogabba: Kleinmanwire over the weekend, I think. Don't believe the numbers are going to move the dial.) Anyway, there's some curiosity about what his plan is here. So who's in Bramson's sights? Borrows? Former Barings M&A guy who then spent years at ???? Well, Borrows has just arrived really. And he's set the stall out for serious cost cutting. And I've not heard any suggestion that shareholders haven't backed him. Came from Greenhill (belated fact) The shares have certainly reflected that. 3i Group PLC (III:LSE): Last: 266.90, up 8 (+3.09%), High: 272.70, Low: 262.10, Volume: 2.86mBlock We're back to within 10% of NAV. So I wonder what the Bramson plan is I sumply don't know, and neither does the sellside. Caz says it in rather measured tones. Sherborne is a c. £200m vehicle launched late last year. According to the placing document, most of the capital raised is earmarked to buy up to 30% of a "target" that it considers to be "undervalued as a result of operational deficiencies and which it believes can be "rectified by active involvement." The previous Sherborne vehicle took a stake in F&C, where Mr Bramson took a very active role. If 3i is his next target we would just note that he will not be able to acquire much more than a 9% stake. This will give him some influence and depending on his agenda he may find other shareholders back any plans. t is also worth bearing in mind that last year 3i shareholders voted decisively against Laxey's radical plans to undertake an orderly realisation when arguably there was a better case for instigating them given the very wide discount prevailing at the time. We are not convinced that there is a huge store of hidden value with the discount now having closed to an estimated 10%, given that relatively new CEO Simon Borrows has been taking a "Bramson-like" cost cutting approach. That said, we have made the point before that if investment performance does not improve over the next 18 months or so - and this is dependent on assets that are already in place and therefore outside senior management control - there would be pressure to follow the controlled liquidation approach. In our view it is too early for that. Nonetheless, we await developments with interest, and will be interested to see what 3i says on 31 January when its reports its year end NAV. And SocGen says it in rather less measured tones. The train has already left the station A bit late in the day Free riding improving financial momentum We find Sherborne's stake building in 3i (as flagged by the group itself in a press release this morning) rather curious given that the self-help and turnaround strategy not only started last May with the appointment of Simon Borrows as CEO, but a great many of the measures needed to fix some of 3i's problems have already been addressed. While Sherborne/Edward Bramson has done a good job at F&C, we see little value for him to add at 3i given the work already done. Having missed the first 40% of the recovery in the 3i stock price, it could be that Sherborne wishes to participate in the improved financial momentum that could come with a pick-up in exits in 2013 and what could well be a much better prognosis for the NAV in 2013/14 (equity markets and macro backdrop permitting). While it is nice to see some external validation of the 3i turnaround by a seasoned value investor, we believe the recent 3i rally is due to buoyant equity markets (which could prove ephemeral) rather than this intervention. Lovely quote that one. Bill Barnard's the analyst. Okay, well one to watch in any case We should move to RBS Been clouted this morning Royal Bank of Scotland Group PLC (RBS:LSE): Last: 347.40, down 20.4 (-5.55%), High: 366.48, Low: 346.68, Volume: 11.24mBlock Stock off 5.6% currently Number of factors at play here i think Journal story, for one. US seeking criminal charges over Libor fiddling. Looking for a guilty plea, which RBS execs are resisting given the rather extreme litigation risk. Surely the criminal threat is just hardball negotiation from the Americans, no? That's what I'd have thought, yes. It's not for me to suggest planted story ..... But this does seem to have woken up some people to the wider stresses facing RBS. We're five years into Stephen Hester's five year plan. And six since it made a profit. And look what's still to be dealt with. PPI, interest rate swap misselling, LIBOR ... I've got a new factor to possibly add into the mix But not quite sure, cos i cant speak/read Italian Maybe someone on the right can help Dal documento emerge che il primo bonifico, da 9 miliardi e 267 milioni (dunque più del prezzo pattuito di 9 miliardi e 230 milioni), venne effettuato il 30 maggio 2008 a favore di Abn Amro Bank con sede ad Amsterdam, nominata - si legge nel documento informativo relativo all" acquisizione di Antonveneta inviato da Mps alla Consob - dal Banco Santander "soggetto venditore titolare di diritti e obblighi derivanti dall" accordo." ABN Amro may be mixed up with the MPS scandal in Italy But not sure whether it is the ABN being part of RBS, or the new standalone ABN Needs more looking into Anyway, just wanted to mention that possible extra fact Interesting spot, yes. Large mystery payments in Italy. It's easy to jump to conclusions, I guess ..... (Puntino - thanks for clarification. Any further details appreciated) Anyway, on a more prosaic level, all RBS's self help is being unwound by regulatory headwinds. And we, by which I mean I, seem to have forgotten the dividend access share on government's B shares Which demands a 2.5x the ordinary dividend or a 7% coupon, whichever's greater. And that only expires when the RBS shares hit and sticks to 650p. This thing's never going to be a normal investment case, is it? And the flight to s**** rally seems misplaced in that context, at least to me. Oh, should also note a Goldman downgrade yesterday afternoon .... Which, as is the way with Goldman afternoon downgrades, only reaches some desks the next morning. Regulatory rhetoric sharpens, shares rise The Financial Policy Committee has consistently recommended that the UK banks boost their capital ratios since its first meeting in June 2011. However, over recent months the FPC's rhetoric has sharpened. Meanwhile, the first report of the Parliamentary Commission on Banking Standards has added further regulatory risk, in our view. In parallel, UK banks have rallied strongly. Against this backdrop, and with potential catalysts over the coming months, we are incrementally more cautious on the UK banks. Range of capital outcomes wide, potential earnings dilution substantial The capital exercise being undertaking by the FSA (at the request of the FPC) could result in a wide range of capital adjustments (from £1.3 bn at Standard Chartered to £8.5 bn at RBS), on our analysis. Moreover, the cost of boosting capital ratios varies considerably across banks. Combining potential capital adjustments and costs, we estimate resulting EPS dilution ranging from negligible (HSBC, Standard Chartered) to 25% (RBS, under a severe set of assumptions). Equity view: RBS down to Sell, preference for HSBC (Conviction Buy), Barclays (Buy) Of the UK banks in our coverage, we view RBS as most exposed to near-term regulatory risk. We downgrade the stock to Sell (from Neutral). We remain Neutral rated on Lloyds Banking Group but highlight near-term regulatory risks to the shares. Barclays could also be impacted, but we expect the group to announce balance sheet shrinkage as part of its strategic review (February 12, 2013) supporting capital ratios. HSBC/Standard Chartered are unlikely to be identified as having capital shortfalls in our view; we retain a preference for HSBC on the basis of relative valuation, return trends and expectations. Credit view: UK banks remain attractive We continue to see the UK banks as one of the most attractive sectors in our coverage on a riskadjusted basis. Comments such as those recently from regulators in the UK increase the probability that the banks will need to carry out additional restructuring that is likely positive for credit spreads and supportive of our Outperform ratings on RBS, LLOYDS and HSBC. Lloyds Banking Group plc (LLOY:LSE): Last: 51.65, down 1.49 (-2.80%), High: 53.35, Low: 51.64, Volume: 59.48mBlock HSBC Holdings PLC (HSBA:LSE): Last: 715.80, down 1.3 (-0.18%), High: 720.00, Low: 713.10, Volume: 4.84mBlock Barclays PLC (BARC:LSE): Last: 297.95, down 7.9 (-2.58%), High: 306.65, Low: 297.50, Volume: 21.85mBlock Generalised profit taking across the sector Looks that way. And justified too. Espirito Santo also sellers Of RBS, downgraded Lloyds Domestic UK banks have been some of the best performing banks in Europe since the ECB's OMT announcement. While systemic and regulatory risks have receded, the operating environment remains difficult in the face of a weak economic outlook. 2013E consensus earnings have fallen steadily and only now appear to be stabilising. Lloyds and RBS are two of the most expensive stocks in our coverage universe with implied costs of equity of 2.8% and 4.1%. Despite the shares attributing no (negative) value to non-core divisions, with Lloyds and RBS 2012E P/core TNAV trading on 1.2x and 1.0x we see limited upside from current levels. Moreover, with the FSA to report back to the FPC in March, short-term regulatory risks remain. With Lloyds most impacted if regulators moved to standardised credit risks (330bp 2014E B3 CT1 ratio impact by our analysis), and RBS the weakest capitalised UK bank (2013E B3 CT1 ratio of 8.9%), dilutive equity raisings cannot be ruled out. Hence we downgrade Lloyds and RBS to SELLs reflecting full valuations and regulatory risks, with new FVs of 48p and 320p. We continue to be BUYERS of HSBC and Standard Chartered for their International growth and Barclays ahead of the restructuring. (@tk: I don't disagree. But there's only so good a jockey can be if the horse has three legs.) Yeah, that's the theme. Shares overbought, regulatory risk ignored, sell. it's top of the leaders board A triumph of information pre-management, this. Anglo American PLC (AAL:LSE): Last: 1,914, up 41 (+2.19%), High: 1,925, Low: 1,861, Volume: 1.42mBlock On the Minas-Rio thing We have a $4bn post-tax writedown Which is at the lower end of expectations The expectations having been established over the past couple of weeks as loads of people suddenly realised it needed at least a $4bn post-tax writedown. Efficient markets at work. According to Cazenove, possibly not. Impairment looks under-cooked, although NPV arguably conservative: the company will record a post-tax impairment charge of $4bn in its 2012 results to account for the changes; pre-tax we believe this amounts to ~$5bn vs our estimate of a $6bn write-down. We continue to believe the ultimate figure will be larger - indeed the higher LT FOB cost estimate wipes a further $1.4bn off our NPV for the project to $1.6bn (end "13E) vs $3.0bn previously. With a current carrying value of ~$9bn on the project as of end "12E and ~$1.5bn (JPMe) more to be spent during "13E, this would imply a further pre-tax write down of at least $4.1bn to come at the end of 2013E. Ultimately, with ~$5bn still to be spent, the final write-down could be larger, although we note the company is taking a relatively conservative approach in basing its NPV only on Phase 1 of the project. The other positive here - against lowballed expectations - is the capex estimate of $8.8bn. previous guidance was "not less than $8bn" And market expected a 9 handle. So, all in all, it's terrible news. But it's not as terrible news as we'd been prepared for. Here's Barclays to summarise. Anglo American has released the details of its review of the troublesome Minas Rio project this morning - slightly earlier than expected. Overall the update is better than expected (the first time we have used that phrase since the asset was acquired in 2007). The overall capex figure is now $8.8bn (we estimated $9bn) leaving c.$5.1bn to spend. The timetable is kept the same with first production due end of 2014 and the impairment charge taken of $4bn is lower than we had thought (asset value on the balance sheet is $10.8bn according to our calcs). We would caveat any excitement though - our NPV for the project is still only c.$270m up from $-408m (increase of 2% of mkt cap.). Moreover the timetable is still contingent on a number of residual land access constraints be resolved by the end of March 2013. We believe there are some in the market who would like to have seen AAL walk away or at least bring in a partner. But overall we see the news as a relative positive. Overall we believe the announcement should be taken in a positive light by the market as it draws a line (albeit dotted until licences are fully granted) under concerns around the capital costs and timelines for delivery of the project. We upgraded Anglo American in December 2012 to EW based on our view that there were a number of potentially positive catalysts in 2013 - the resolution of issues surrounding Minas Rio was one of them. Earnings based valuations still look relatively rich though, with the shares trading on a spot PER for 2013 of 12.2x, EV/EBITDA of 6.5x and free cashflow yield of -3.2%. However, it's at parity with NPV and a 35% discount to its SOTP. So, well managed newsflow That's how I'm seeing it. Still a long way to go to figure out what shape Anglo should be, though. And, in that context, I guess the progress here is welcome but minimal. Outlaw has been complaining that we don't do enough macro Problem is finding fresh macro Here's something to keep you busy Outlaw Abstract The financial and economic crisis has generated renewed interest, especially among policy-makers, in earlywarning systems that could help identifying fiscal and macro-financial vulnerabilities potentially triggering risks. Against this background, this paper presents an early-warning index of fiscal stress, incorporating fiscal, financial and competitiveness variables, some of which are common to the scoreboard used in the EU for the surveillance of macroeconomic imbalances. Thresholds of fiscal risk are determined, based on the nonparametric signals approach, for the overall index, the two sub-indexes grouping fiscal and financialcompetitiveness variables and each individual variable used in the analysis. Values of the overall index beyond its critical threshold pinpoint to potential risks of fiscal stress in the short run, while the analysis at individual variable level allows identifying possible sources of vulnerabilities, which is key to design appropriate risk-mitigating policies. The results obtained highlight the importance of incorporating financialcompetitiveness variables in an early-warning system for fiscal stress, as such variables appear to be better "leading indicators" of fiscal stress than fiscal variables are. The results also speak in favour of using an early-warning composite indicator of fiscal stress, rather than looking at the individual variables taken in isolation. Results obtained by applying the proposed methodology to EU countries are presented in the last part of the paper. An early-detection index of fiscal stress for EU countries Courtesy of the European Commission There's an interesting CS note on this that i need to get up in the Long Room Will share cover page An early-detection index of fiscal stress In a recent paper the European Commission presented a new indicator of fiscal stress, incorporating not just fiscal but also financial and competitiveness variables, to detect early signs of potential fiscal stress in European countries. The paper makes the interesting point that financial and competitiveness indicators are generally more able than fiscal variables to foresee an episode of fiscal stress. Ireland and Spain are good examples: the initial fiscal issues were concealed by booming, domestic demand-driven, fiscal revenues and by unsustainable developments on the private debt and external imbalances front. Based on the latest data available, the index shows clear risk of fiscal stress for Cyprus, while Spain (together with Portugal and Greece) is a borderline candidate. Italy, France and Germany appear at low, very low and almost inexistent risk of fiscal stress for 2013, respectively. We present below the structure and methodology behind the European Commission's fiscal stress indicator and provide our analysis on how things could evolve from here, including what would be the key changes required for fiscal stress risks to increase and/or decrease, with a special focus on Spain. Full implementation of the planned adjustment would reduce the risk for fiscal stress in the short term in Spain, although a more serious chance to leave the "danger zone" is unlikely until next year. GB Krona mentions Glenstrata That was an interesting interview with Mick the Miner yesterday "It's not a merger, it's a takeover," was the line picked up most often elsewhere. Which I thought was stating the obvious. Also talking about a middle management exodus and Glencore's need to get the deal done being ultimately damaging. He talks about how his management style is very devolved Gives managers lots and lots of freedom There's a certain amount of talking his own book here, of course, though it may be unfair to suggest it. Xstrata PLC (XTA:LSE): Last: 1,168, down 7.5 (-0.64%), High: 1,182, Low: 1,166, Volume: 788.96kBlock Glencore International PLC (GLEN:LSE): Last: 388.40, down 2.4 (-0.61%), High: 393.05, Low: 387.85, Volume: 2.20mBlock Well, i think he's somewhat sore Understandably so. He was the fall-guy here. But good interview by Andrew Hill and Helen Thomas Okay - should note BT I guess. Saying it's a crowded long. Price performance is quite surprising. Come up from about 100p in two years. BT Group (BT.A:LSE): Last: 244.50, down 7.6 (-3.01%), High: 246.60, Low: 244.00, Volume: 8.73mBlock What does BT do that others don't? It's an internet provider, right? It owns more copper than most, admittedly. We have had a Buy rating on BT since June 2009, liking the combination of 1) excellent management, 2) the commitment to turning the business around, 3) the focus on cashflow delivery through cost reduction and 4) the deleverage effect (paying down debt and de-risking of the pension risk). However, we now feel it is appropriate for a "pause." Although BT is not overly expensive, trading on just c.10x P/E and 5.1x EBITDA with a 11.4% FCF yield, we sense that the stock is a very "consensus long" with most investors already owning the stock. In our view this leaves the stock exposed as earnings appear to be flattening (indeed, consensus EBITDA for Q3 is expected to be flat yoy for the second consecutive quarter) while underlying revenue at -4.5% is some 6.5ppt off the guidance for March 2013 that BT gave under two years ago. We worry that BT may be tempted to use some of its cashflow generation (which has been used to top up the pension so far) to drive revenues. That would mean an impact on either opex or capex and put FCF guidance under pressure. Just looking at the revenue breakdown in that note ..... Global Services is 44% of BT's group revenue. More than retail, at 42%. It's more Logica than it is a phone company. That's under-appreciated. Goodness, didnt realise that I'm a BT customer again Oh, are you? I was considering switching. Web's not cheap, but it's not bad Yeah, I'm with Sky. Which is not cheap and is bad. Anyway, that's BT done. Oh, we've done ISPs so how about some house prices Just to complete the Dinner Party Live double whammy. Interesting chart via Grainne Gilmore at Knight Frank this morning. Little difficult to see, but it's international buyers in prime areas. Nearly 60% of buyers non-national in Knightsbridge, where prices are up nearly 15% /in a year. More than three quarters of South Ken buyers are "international" Trouble is, this ongoing trend hollows out neighbourhoods There's one large house near me, overlooking Greenwich Park which is just serviced by an agent, who puts flows in the window etc. But no one has even visited in 12 months It's clearly just a vehicle for hiding cash Interested also to see Wapping on that list. A third of buyers apparently not from round these shores. This is Wapping, remember. It's a big gated development along the water, next to what is largely a slum. This is what's meant by hollowing out areas. It's grim. And I'll be delighted the day interest rates crank back up to 6% and it all goes pop. Anyway, that's midday. Pushed over the line by a housing market rant. Should we wind up now? (@outlaw: having worked at the Times for too many years, I can assure you that it is. It's a slum with a bit of veneer stuck on it.) So - thanks for all your comments.