Betfair Official Blog

Daily View - 15th February

The big boys look set to take another beating. But don't write them off just yet...

The banking sector, which has been pretty hard hit anyway, took a triple whammy this week when UBS reported almost unbelievable sub prime/credit losses. Elsewhere, Bradford and Bingley reminded us that there are other parts to banking portfolios that are at risk, and the Germans revealed their own efforts to avoid a financial meltdown.

Share prices and yields look almost ridiculously cheap at current levels with stock such as B&B giving over 10% and both Barclays and RBS around 7%. For companies that are likely to be around for a very long time, these look (when compared to even their own issued paper let alone UK Gilts), to be very tempting indeed.

The problem for the big investors is not the value as expressed today, but the value in a few years time. With shell-shocked balance sheets, massive capital injections (at considerable cost) and virtually no chance of big takeover/merger stories (except in extremis), bank-sector analysts are worrying about future growth potential. Share prices currently reflect not so much the value of a company today but the probability of growth tommorrow. A company showing 20% long-term growth history will trade on a much better multiple than one showing 5 or 10%. So how do you value a sector that is in danger of giving negative numbers for the foreseeable future and may very well have further shocks from, as yet, unforeseen quarters?

As with so much business talk these days, this whole question will revolve around your expectations for the state of the global economy. If like many, you believe in worldwide economic weakness, then even at current prices, the banks may very well be poor value. If you are more optimistic however, and believe that the non-Western portion of the global environment will pull us out of the fire, a small dabble may well pay off in the long game.

The FTSE rather disappointed yesterday after a very late sell-off took us from 30 or so up on the day, into negative territory. Today we are looking to come in just slightly to the downside at around the 5875 level but there will be hopes that with both Europe and the Far East failing to follow through on US weakness, we may be in for a nice, quiet day. There is resistance at 5915-5920 which if broken would give the bulls a target of between 6000-6050, but the failure to close higher yesterday will have the bears looking for a pull back to 5825. A close below here would be short-term negative and may give sellers the chance for a battle back down to 5680/5690.