Are markets too sanguine about contagion from Greece?
The short answer is yes, says thinktank Capital Economics, which argues that the calm is unlikely to last. That verdict seems correct. It is bizarre that bond yields across the eurozone, apart from Greece’s, continue to hug Germany’s. Spanish 10-year yields are 1.4% even as the anti-austerity party Podemos, which wants a debt restructuring, makes the running in opinion polls.
Capital Economics offers a few reasons why markets might be relaxed before concluding that bond prices are still wrong. First, expectations for Grexit, or Greece’s departure from the euro, are still low. Second, Grexit is deemed less risky than in the past because the European Central Bank has greater crisis-fighting powers than in 2012. Third, even Portugal’s position is not as dire as Greece’s and cheaper oil prices may give everybody a lift.
Even so, it all smacks of complacency. The eurozone’s ability to share risks is about to undergo its severest test and the starting positions are miles apart. The only safe bet is that the negotiations will take ages and involve brinkmanship.
Then there is the risk that is barely discussed. What if Greece is bundled out of the euro but then, after the initial shock, prospers? Capital Economics reckons that’s the way the script would go, encouraging other countries to leave. If that’s a real possibility, those bond yields do indeed look far, far too low.
“Price reduced” notices are appearing with increasing regularity on London houses advertised on property websites. The process has already happened to Foxtons shares. A year ago, amid the Help to Buy-inspired excitement, they were heading to 380p, versus a float price of 230p six months earlier. Then came the slowdown and a profits warning in October. Foxtons has been in sub-200p territory ever since.
The latest update was no worse than last autumn’s confession. Top-line operating profits for 2014 will be £46m, down from £49.6m in 2013, but normal service is maintained on the dividend front. Foxtons, free of debt and generating cash, tries to pay out 35%-40% of post-tax profits. That means 9.7p per share for 2014, or a yield of 5.4%.
Not bad, if you believe life will get better for capital-focused estate agents when the general election is over – thus yesterday’s 12% rebound in the share price to 180p. And Foxtons, say its fans, has a nice balance between sales and lettings. The latter rose while the former fell at the final quarter of last year.
The problem, though, lies in believing that Foxtons can continue to charge a non-negotiable sales commission rate of 2.5% for eternity. That’s £13,625 per sale on the company’s average selling price of £545,000. On a £1m home, it’s £25,000. For a middleman, it just looks too rich.
Sir Charles Dunstone, among others, is promoting a cut-price web-based alternative. His business may not be the one that succeeds in revolutionising a cosy industry. But medium-term pressure on commissions is surely in only one direction – down.
Power cut welcome
National Grid’s bosses have decided they have better things to do with their time than pump out quarterly trading updates. You can’t blame them. National Grid is a regulated transmission company and its prices in the UK are agreed on an eight-year cycle. The business is meant to be boring and usually succeeds.
Here, for example, is the “highlight” from last July’s quarterly dispatch. Chief executive Steve Holliday concluded: “We are maintaining our outlook for 2014/15, reflecting the expected delivery of another year of solid operating and financial performance and asset growth, consistent with sustaining our long-term dividend policy.” In other words: nothing interesting has happened since the last time we spoke.
From now on, National Grid will issue only half-year and full-year updates as a matter of course. UK financial regulators have permitted such a switch since last November. Very sensible. As National Grid’s finance director Andrew Bonfield says: “Mandatory requirements to publish information can frequently provide an unnecessary focus on matters of little relevance to a long-term business.”
Those remarks could be echoed by quite a few companies, not all of them regulated utilities. The world would not fall apart if tobacco companies, property developers, even insurers, spoke only twice a year, apart from on occasions when they have specific good or bad news to relate. Quarterly reporting is not the only cause of too many investors’ short-term horizons. But a strike against an overload of unnecessary information is a small advance for common sense.
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