Look to the banks to signpost the future

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The Independent Online
Philip Sanders talks to Tom Eyre, investment manager at BWD Rensburg, about the Bank of England's decision to leave interest rates unchanged.

PS: Does this mean we have seen the end of this cycle of rate rises?

TE: The interest-rate scenario is evenly split. On the one hand, we have a very buoyant service sector, but on the other, the strength of sterling has really crimped manufacturing. Wehad trading statements from retailers, such as DFS and MFI, pointing to a marked slowdown in the consumer sector. The Bank will probably be encouraged by that, and I think they did the right thing holding off for now. In a month or so there will probably be more favourable statistics coming through to confirm signs of a slowdown. I would not like to say, though, that we are at the end of rate rises, but the economy is showing signs of cooling off in the short term.

PS: So it is a question of waiting to see what figures come out next, particularly on retail sales?

TE: Yes - retail sales, unemployment and average earnings figures, which have unnerved the City in the past but are showing signs of retreating from recent highs.

PS: Bank stocks have surged ahead in recent months but lost some gains this week. Are they losing their shine?

TE: The banks really are the purest play in the market. If stocks are going to come back on profit taking and warnings from the other side of the world, the banks are going to be susceptible to a sell-off. Also we had some disappointment from the Halifax figures this week. There was no special dividend and no news on acquisitions.

On fundamentals all the banks and financial stocks are fully valued. It was indicative that the Halifax has decided not to make an acquisition at this time because the prices are far too high. The Prudential said this last week. But consolidation, which may be just around the corner, will ignite interest again.

PS: Some are surprised we haven't seen more mergers in the industry already. Are you surprised by this?

TE: No, in fact I am surprised at how quickly things are moving, if you look at Commercial Union and General Accident getting together just 10 days ago. The independence of Barclays and Lloyds goes back centuries and lack of short-term news does not surprise me. I do see consolidation in the future, and it isn't discounted because it didn't happen this week.

PS: There was a spate of company reports last week. One was BTR, which revealed a pounds 2bn share buyback. Would you buy BTR at this level?

TE: Our firm has had an involvement in BTR for many years and it has been a very disappointing investment. The news this week was seen as positive in that the price achieved for the packaging business was very good, giving the shares a short-term boost. The statement on trading, however, gave us very little confidence for the future - margins are under pressure and overseas trading looks difficult, especially in Asia. BTR looks very cheap if you take out the cash, and it is on a single-digit p/e, but we are not going to see a substantial re-rating. We are therefore looking to sell into any strength.

PS: Another trend this week is investors moving money into FT-SE 250 companies away from the big FT-SE 100 stocks. Have you followed that?

TE: Yes, I have been very aware of this. Investors are looking for value at a time when the FT-SE has run a bit ahead of the game. Pension funds and institutions have a lot of cash and deposits, and fund managers are trying to address the significant underperformance of the 250 and smaller- cap index against the FT-SE. They are buying the value stocks that fund managers M&G and PDFM have been following so long.

PS: Is the strategy right?

TE: There is a case for buying sectors such as housebuilders, which were massively de-rated at the start of the year and are now catching up. Results from Wimpey and Bryant Homes show that the end of the world is not nigh. It is a dangerous game in general, though, to look at value stocks in sectors such as food manufacturing, chemicals and engineering and assume that just because they are on single-digit p/es they are worth buying. I would look to do some selective buying but avoid a lot of poorer companies in the mid-250 index.

PS: What are you looking to buy?

TE: There is some value in the FT-SE 100. Marks & Spencer are a pound off their high, they have suffered from post-results indigestion and weaker retail sentiment. British Airways' figures suggest it is in good shape and will benefit from cheaper fuel, plus the stock is off its highs.

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