THE UK remained in recession in the third quarter of the year from July to September. Whether you believe this or not, it is official, as confirmed last week, so there can be no arguments about it.
To many, this is a bit of a surprise, becaue it was very clear that most businesses returned to normal service after the shock and awe of the first few months of the year. As pointed out many times, the stock market trades on a future probabilities basis, and started its relentless recovery in the first week of March, at the height of the crisis. So, despite the third quarter creating a record of six quarters of contraction, investors see light at the end of the tunnel.
Those with rational heads, having seen many crisis points before, held on for recovery in the early months of this year and, with a large dollop of hindsight, have been proved to be absolutely right to do so. By any historical comparison, the downturn has been very long and drawn out. This is no new phenomenon, because property and bank lending problems have been seen before, and have shown good subsequent recoveries.
It is hardly surprising that those companies hardest hit by the recession have shown the most marked rebound in value.
Factors that are helping the recovery have been residential property values increasing this year and, of late, commercial property values going up. As property lending is the largest of all bank borrowing, this is good news for the mortgage and property lending banks.
The most significant beneficiary is Lloyds Banking Group, having taken on an enormous property book from HBOS.
Initially, this was a poison pill, but this may turn out to be a sweet treat in the future.
The penny seems to have dropped at HM Treasury that, as a shareholder of Lloyds, its interests are aligned with other shareholders, and methods to damage shareholder value damage its own chances of making a whacking great profit in the long run.
The UK Government scheme to guarantee residential mortgage-backed securities, intended to help bank liquidity and mortgage lending, ended last Thursday. The scheme, set up in the April Budget, was initially available for six months, in exchange for a large fee. No banks took up the guarantee scheme.
Further, both Lloyds and Nationwide have successfully issued mortgage-backed securities off their own back.
The Government Asset Protection Scheme discussed in March, but importantly not agreed to, is clearly not in the best interests of Lloyds shareholders. There is no longer any need to insure £260bn worth of mainly commercial property lending, particularly when the bank was to face the first £25bn of write-offs, and certainly not any need to pay a fee of £15.6bn.
If Lloyds no longer wishes to enter into this scheme, it seems a bit rich asking it to pay a large sum for any implied insurance cover. If you get a car insurance quote and do not take up the insurance, how could the insurance company have any grounds to ask for a fee for any offer of cover?
At the end of the week, Lloyds is likely to announce how it is to raise capital to boost liquidity ratios without the Asset Protection Scheme. The share price rose last week as appetite among shareholders grew for supporting the company, restraining the Government stake and the goal of profitability returning.
■ Anthony Platts is a divisional director in the Teesside office of Brewin Dolphin, and can be contacted on 0845-213-1340. All prices quoted in the article are from public sources. The views expressed are not necessarily held throughout the Brewin Dolphin Group. You should bear in mind that no investment is suitable for all circumstances and it is important to seek expert advice if in any doubt.
Brewin Dolphin Limited is a member of the London Stock Exchange, authorised and regulated by the Financial Services Authority.
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules hereComments are closed on this article