Where are the British banks going?

There has been chatter in the UK about the creation of a "toxic bank" to house the ghastly assets not wanted by the British banks. One potential result would be to see the Royal Bank of Scotland (RBS) halve in size. It would be in the strange position of having no assets left from its ABN Amro acquisition but would still be paying for it.
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I suppose British premier Gordon Brown looks at the electoral calendar and has decided he has not got enough time for the banks to gouge out the profits from UK consumers and corporates while it slowly writes off the problematic items on its balance sheet. The prime minister wants the British banks to lend again but they have instituted very conservative lending standards in the residential property sector and they don't seem to have any desire to lower them.
The UK economy is very dependent on the housing sector. House prices have fallen badly but there has not been any sign of real capitulation selling. For instance, the buy-to-let sector has held up well given the implosion of the main lender
Bradford and Bingley. If vendors start accepting the offers being actually made then
it will at least get the transaction numbers moving.
Hopefully, the toxic bank will not have to take lots of mortgage loans but unfortunately it will be full of acronym rubbish such as SIVs, CDOs as well as a load of corporate loans.

I am thinking about investing in premium bonds.

One of the main problems about investing in UK premium bonds is that punters don't often win. This makes them a poor hedge against inflation. Now, the odds over winning a prize have sharply got worse over the year. However, if there is deflation then premium bonds won't suffer as much from inflation as in the past. Over the last few years I have spent money on them and overall premium bonds have been disappointing performers. However, they could be a short-term punt over
2009 and with the government guarantee of getting your money back, that is a pretty powerful incentive in these times of troubled banks. Don't expect to win.
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In actual fact I don't expect real deflation in terms of actual falling prices. Inflation indices are artificial constructs and the ones we have don't measure city or regional differences. For instance, if petrol prices go down, they are still expensive (mainly comprising taxes in Great Britain). Fares are going up above inflation and council taxes will also increase over inflation.
If the retail price index did go down, would the modest state pension be modified downwards as well? Of course not but there could be pay cuts in the private sector as
exemplified by JCB.

British IFAs could face a bleak year in 2009.

UK independent financial advisers are pretty much unloved by the regulatory body FSA.
Comments on the retail distribution review focus on the appearance that the banks have had a pretty easy ride. However, IFAs have got to consider the here and now. 2009 could be a bleak year but there has been so much change in the financial landscape that clients would need more advice rather than less.
For instance, the popular investment house New Star has seen the creditor banks take control while some of its high flying funds have closed for redemptions. You do recommend now? M and G or Fidelity.
Can you recommend structured products? The collapse of Lehman Brothers as a counter-party has made supposedly low-risk products into very high risk ones to put it mildly. Supporters of structured products point to their defined return and
low cost.
The collapse of the Icelandic banks have put the spotlight on the deposit guarantee schemes in offshore territories and have made a lot of British councils look stupid.
There is an area of advice in offering recommendations on where to
put deposits.
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Another area is pensions. The forthcoming introduction of a higher tax rate of 45 pct
will probably lead to an increase of pension contributions. SIPPs will continue to grow.
Finally, quite a few potential clients will be planning to leave the United Kingdom. They will need help in navigating the tax codes of countries such as Australia and the United States. The collapse of sterling against the euro might make moving to eurozone countries less attractive.

Merry Xmas to all my readers!!

I suppose it is a bit late to send a Christmas message to all my readers on Christmas Eve, when it is very quiet. I will go back to the theme of corporate bond funds but my experience is mixed all the same. I have been a long term modest investor in City Merchants and in capital terms the performance has been terrible. The best idea is to have a range of investments/deposits/properties!! I know that diversification in equity terms has not really worked but let's hope it should help in the future. Everybody seems to be down 30 pct and I suppose people will be averaging down their losses. The re-investment of dividends is crucial.
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One massive change in the UK investment landscape is the virtual disappearance of British banks from future portfolios. One of the staggering events of 2008 was
the death spiral of Royal Bank of Scotland (RBS) and Halifax. I could not understand why they did not hit the short sellers by buying their own shares. I suppose they wasted too much capital by buying back stock at previous sky-high prices. Is
RBS a buy at 44 pence?

ZIRP does not sound very good!!

I wonder what British independent financial advisers (IFAs) can recomend in terms of investments when we have got ZIRP or zero interest rates coming to us soon. The U.S
Federal Reserve Bank (FED) under Ben Bernanke seems to have pressed the panic button
by lowering its rate to a range of 0% and 0.25%. Here, the Bank of England might have a bit to go from its current base rate level of 2%. However, IFAs are having to survey the wreckage of the British financial scene and what do they recommend? Ten year gilts yield around just 3.4 pct. It is probably too late to get into them while long term they must be affected by the collapse of sterling and future inflation.
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Quite a few people are recommending corporate bond funds, which are offering significant yields and could sit quite nicely in SIPPs.

New Star has faded and John Duffield is leaving.

British investment manager New Star has fallen under the control of some major banks and its founder John Duffield is leaving. It operated a culture of star investment fund managers, some of whome found it difficult to outperform. Investment conditions have been tough for active stock pickers.
A columnist in MoneyMarketing jokes that he always wrote articles about New Star under the fear of receiving writs from the company's lawyers.
Another columnist says New Star's troubles have affected the fund management industry as a whole.
Meanwhile, the Bath-based firm Fidelius offers advice from simple mortgages to investment planning. It approaches the requirements of the client with a completely open mind.
Meanwhile, Nic Cicutti of Money Marketing, has written a perceptive article about the New Star implosion. For instance, he notes that New Star markets over 40 funds
compared with around twelve in 2002. Fashion funds reflected latest fads for investors. There was also no rigorous, disciplined approach when the stock market started to collapse. Also, good managers will have periods, when they are unable to outperform due to being in the wrong sector or having the wrong investment style.

Major banks could take control of New Star.

The major banks could take control of UK investment manager New Star. You would have thought that fund management was a straightforward and simple business with not much to go wrong. It seems that New Star was weighed down with debt, which was very negative when funds under management suddenly went south. When these funds go up, it can be a very profitable business if costs stay the same. It is sad that it has not worked out for New Star founder John Duffield, who is a real character amongst the grey denizens of the City.
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One worrying factor is that quoted businesses are going into administration nearly every week. It seems like it anyway (Woolies, MFI, London Scottish).
It will be interesting if the Bank of England lowers interest rates to 2 pct from 3pct. If the banks are not passing on the decrease to borrowers but are applying it to savers, then the Bank might consider a pause. It does not seem to be too worried about the exchange rate but sterling does need some support to prevent a major fall.