Private Investor: Is Barclays a bargain or a basket case?
Saturday 10 November 2007
I'm in a bit of a quandary, to be honest. I don't know what to do with my Barclays Bank shares. Allow me to share the full shame of this investment decision with you. It's therapeutic, for me at least.
I bought them on 5 October at 660p. In the brief time since then they've dropped 27 per cent. Admittedly, in absolute terms, I'm doing better than the Barclays director who bought 127,000 shares at an average price of 548p last week and is now sitting on a paper loss of about £80,000. The shares, at the time of writing, are below £5, and at three-year lows. Sad, eh?
The problem, of course, is that no one knows how much Barclays (and all their British and international peers, for that matter) will have to write down as a result of the credit crunch. I suspect that not even Barclays knows – and, indeed, it is impossible to know.
After all, the credit crunch is a process rather than an event, and it is not over. Thus even if the banks "owned up" to the losses they're facing now, you cannot be at all sure that things won't be in an even worse state in, say, six months' time. This is because the credit squeeze tends to feed on itself. Defaults in the US sub-prime market go up and the banks are forced to make more provisions and are even less willing to lend to each other.
This credit squeeze then trickles down to the consumer end of things, where the poor, benighted sub-prime borrower attempts to refix his or her mortgage and finds the door slammed in their face. Then they default, the banks have to write off even more bad debts, lend even less to each other, see credit tightened to sub-prime borrowers even more... and so the vicious circle goes on. Who knows when all that is going to end?
The banks are in a very difficult position. If they say they don't know how much the losses will be – because no one knows how many turns of this vicious circle there will be before things stabilise – then they're damned for being clueless. If, on the other hand, they come up with some large but "final" numbers to satisfy the doomsters, then they're at risk of not telling the full truth – and will be duly damned for not being open enough.
I'm sure Donald Rumsfeld had a category for this sort of problem – unknown unknown, perhaps – but whatever the philosophical aspects of it, it is certainly doing the markets and investors like me no good at all. The best guess seems to have emerged in a broker's note last week that has gained a certain amount of notoriety, as it has prompted a fair amount of panicky selling. On the back of huge write-downs in the US – Citigroup on $11bn (£5.2m), Merrill Lynch on $8bn – Antony Broadbent of Sanford Bernstein has done some number-crunching: "Using the aggregate results from US and European peers to create a realistic downside write-down and revenue reduction scenario for Barclays and Royal Bank of Scotland, we estimate a potential value reduction of £4.6bn and £4bn."
However, he kept his "outperform" stance on both banks. Thus, even with the two banks losing a combined £27.6bn of market value so far this year, (and even more since he put this note out), he said that the current level of discounting was excessive. "We are left attempting to piece together various, disparate clues as to what is really going on." His target price for Barclays is 740p – down from 810p but some way ahead of where we are now.
In a "realistic downside scenario", Barclays could write down £1.6bn and RBS could write down £500m, Mr Broadbent tells us.
So what to do?
I'm paralysed by indecision. I'm unwilling to crystallise a loss, and events don't seem so dreadful yet that it would justify me doing so. When I bought and sold Northern Rock I did so in the certain knowledge that, while I had bought the Rock at comparatively cheap levels – 660p – at the time I was selling at the best price I could ever get – 450p – and there was really no alternative. Barclays is certainly not in that category.
Logically, perhaps, I ought to be brave and buy some more at what may turn out to be a ludicrously cheap rate. That will only happen, though, if the credit squeeze doesn't intensify too much, which I'm doubtful about. I think I'll reduce my Barclays holding – the coward's way out.
I ought also to mention a much happier investment – Rio Tinto. I've been a long-term fan, and so, it seems, is its fellow giant BHP. The bid for the shares has sent them comfortably above the £50 mark, which I never thought I'd see. Investing is full of surprises – and not all bad ones.
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