It’s hard to know who is most to blame: Mario Draghi, for leading investors up the garden path; or investors, for believing that the European Central Bank president’s talk of doing “what we must” equated to a firm promise of a bigger dose of quantitative easing.
Either way, the marriage of a teasing central banker and a gullible set of investors produced an ugly stock market on Thursday. The French and German markets fell 3.6% and even the FTSE 100 shed 146 points, or 2.3%.
On balance, you’d mostly blame the investors. The eurozone economy has been chugging along at a quarterly growth rate of roughly 0.3% for the past 18 months. That’s not a good performance, but neither is it so awful that the ECB had to reach for the emergency button.
Thus the ECB’s compromise decision – no increase in the €60bn-a-month size of the asset-purchase programme, just an extension by six months – was always a reasonable possibility. The market just got its odds wrong: it had €75bn-a-month, or more, as a nailed-on heavy favourite.
But we can draw two other conclusions from the mini-drama. First, financial markets remain addicted to the quantitative easing drug, at least in Europe. That’s alarming if, as now seems possible, the ECB’s enthusiasm is waning under German pressure, to be replaced by more urgent calls for politicians to apply fiscal remedies and structural reforms.
Second, unfairly or not, Draghi’s authority has suffered a heavy blow. In the market’s eyes, a central banker is only as trustworthy as his or her last communication. Next time the ECB wants to talk down the euro, Draghi will struggle.
Purplebricks is worth a look
At first glance, a £240m valuation for Purplebricks, one of the new breed of online estate agents, is ludicrous. The business launched in April last year and is already being valued at half debt-free Foxtons’ market capitalisation (£500m), or more than a quarter of the giant Countrywide’s (£900m).
Moreover, readers of Thursday’s announcement of Purplebricks’ plan to float on the Alternative Investment Market were not told basic financial information, such as turnover and profits; those numbers are published later in the process. In the meantime, it is almost meaningless to boast that revenues in September 2015 were ten times greater than in September 2014 when you’ve been operating for only 19 months.
Back-of-the-envelope calculations suggest Purplebricks is still a small business. It has 4,300 properties on its books for sale and if each generates revenue of about £1,000 via the low-fee model, that produces £4.3m. Even if the stock turns over 10 times in a year (ie each property sells in about five weeks), that’s £43m of revenue at the current pace.
So a £240m valuation would represent almost six times revenues – aggressive even for a business with the magical “disruptive” label. What’s more, the stated gross profit margin of 59% excludes the cost of TV advertising, which doesn’t come cheap and is Purplebricks’ main medium for building its brand.
But, actually, knee-jerk scepticism is probably the wrong response. That £240m price-tag is not plucked out of the air. The company has just raised £25m via an institutional placing at that valuation. True, some investors also took the opportunity to sell £33m-worth of stock, but there has hardly been a rush for the exit. The biggest shareholder, lauded long-termist Neil Woodford, via his funds, roughly maintained his stake at 29%. Chief executive and founder Michael Bruce has 17%. And chairman Paul Pindar, an old hand from Capita, has 4.5%.
Aside from heavyweight backing, the other reason Purplebricks is worth a look is the business model, which looks a genuine threat to traditional estate agents charging commission of between 1% and 3%. Purplebricks’ flat-fee averaging £1,080 undercuts the old brigade by a wide margin. The cleverer bit, though, is that the business does not dispense with human beings. It calls itself a “hybrid,” using what it calls “local property experts” (in practice, self-employed former estate agents) to do valuations and the hand-holding work. That looks smarter than an online-only approach.
The comfortable world of estate agencies has looked ripe for reinvention, to the benefit of customers, ever since the internet came along but it has never quite happened. (Rightmove and Zoopla don’t count because they merely grabbed agents’ marketing budgets, rather than cut fees for punters). One of these days, someone will crack it, which is why so many online outfits are having a go. There are no guarantees, but Purplebricks looks well placed.
Bank branches face uncertain future
Antony Jenkins says he was surprised when he was sacked as chief executive of Barclays in July. He shouldn’t have been. The rumours had been around for weeks; the share price was going nowhere; and a punchy new chairman, John McFarlane, had just arrived.
The more interesting part in Jenkins’ interview with the BBC, however, was his prediction that 20-50% of bank branches in the UK will close in the next decade, largely because of the rise of new technology. Jenkins made comments along the same lines when he was in the job, but a figure of up to 50% is a substantial upgrade.
One suspects he’s close to the mark, and that most bank chiefs would agree but don’t dare say so. Closing branches is banking’s next big challenge – a political storm is guaranteed.
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