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Banks, insurers extend losses on Brexit woes

Market weakness continues following Friday’s news.
Investec's Johannesburg headquarters. Among SA banks, Investec has been hardest hit by Brexit. CEO, Stephen Koseff said previously that Brexit will be negative London as a financial centre.

JOHANNESBURG – Banks and insurance companies continued to shed value on Monday, extending a notably weaker performance on Friday, as market participants fretted over what the United Kingdom’s (UK) exit from the European Union (EU) will mean for growth in Britain and the rest of the world.

The JSE’s Banks Index closed 4.28% down from its open, while the Life Insurance Index was down 5.01% weaker.

Among the biggest losers were Investec Plc and Investec Ltd, which had given up 8.58% and 9.66% respectively since their Friday close, following losses nearing 10% on Friday. Investec has a primary listing on the London Stock Exchange (LSE) and derives roughly 40% of its operating profit before tax from its UK and other businesses outside South Africa.

Duncan Artus, portfolio manager at Allan Gray, suggested that Investec’s share-price falls were an over-reaction. “Approximately two thirds of Investec’s money is earned in South Africa and at the current valuation you are not paying much for the UK bank,” he said.

Historically bullish on Investec, Anchor Capital has pulled back its exposure to the London-listed bank. “[Brexit] fundamentally changes the business case for [Investec], which will face added complexity in working out its legacy businesses in the UK. The lower rate outlook in the UK is likely to keep the net interest margin suppressed, delaying the recovery in the UK bank,” said Liam Hechter, equity analyst at Anchor Capital.

Part of Anchor’s investment thesis for Investec was a rebound in the UK economy and higher interest rates.

Speculation is widespread, however, that the Bank of England will cut rates to zero and the UK may slip into recession.

South Africa’s Big Four local banks (Barclays Africa, FirstRand, Nedbank and Standard Bank) are selling off on extended risk-off trade, said Hechter.

A higher discount rate is being priced into banking shares, Hechter said, as a weaker rand/dollar exchange rate and higher bond yields increase the cost of equity that investors demand on the shares.

“We don’t think there will be immediate severe implications for domestically-focused banks’ operating profits,” he said.

Life insurers tumble

Old Mutual plc, which also has a primary listing on the LSE, was 5.21% weaker than its Friday close in midday trade, the most among its life insurance peers, after losing 7.51% on Friday.

Old Mutual’s UK Wealth business is most exposed to any economic and financial-market fallout from Brexit.

“Old Mutual Wealth has a robust business model and believes that this exit result is manageable, though recognises that it may be more disruptive in the short term than if the vote had fallen in favour of remain,” Old Mutual spokesman, William Baldwin-Charles said on Friday.

Baldwin-Charles said that the results of the EU referendum do not change Old Mutual’s planned managed separation, which will see the group split into four separate businesses.

Hechter said the pullback in Old Mutual’s share price was “slightly overdone”. “Wealth management businesses will be less impacted than banking and our calculations suggest that Old Mutual Wealth only accounts for about 30% of the group’s value,” he said.

While Sanlam and MMI Holdings both have exposure to the UK economy, Discovery is most exposed through its VitalityHealth and VitalityLife businesses. It spent £5 million last year to move – previously PruHealth – onto its own system infrastructure.

Generally, banks, insurers and property companies tend to be hardest hit by events such as Brexit since they are more leveraged (i.e. they hold more debt) than the average company and rely on liquidity for funding, Artus said.

“I don’t see Brexit having a massive effect on South Africa’s banks,” he added, noting that the sacking of former finance minister, Nhlanhla Nene in December was more worrying for banks in terms of their long-term fundamentals.

“So little of the volume [traded] in stock markets is [traded by] normal investors. Exchange traded funds (ETF), high-frequency trading, algorithmic trades and hedge funds make up a larger portion of trading,” Artus explained.

This can distort the picture in the short term. For example, trades may be automated when a share price or currency falls below a certain level, which then drives the prices lower, or selling out of a financials or banking ETF means selling all the underlying banks in the ETF.

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There will be no lasting recovery without serious reform; it is a sine qua non. One cannot turn their economy around when the political and business structures are systemically corrupt, and the elites are preoccupied with looting it, and hiding their spoils offshore.

I think it sounds like Allan Gray is talking their book as they could be overwieght and overextended in Investec Ltd and Investec Plc shares!

Please don’t forget what happened when you were also very overextended in the Western Areas shares………

End of comments.

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