Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Will Chinese bribery scandal do to GSK what Gulf of Mexico oil spill did to BP? Central bankers peak, and markets relax. Barclays stockbrokers: investors give the thumbs up to FTSE. Barclays in energy fixing fine, but what will follow? Companies in the news: Long River Partners, Severn Trent, Smiths Group, Barclays
Will Chinese bribery scandal do to GSK what Gulf of Mexico oil spill did to BP?
From BP’s point of view, the sad thing about the Gulf of Mexico oil spill is that if it wasn’t for that the company would be rivalling Royal Dutch Shell and Exxon Mobil. In many respects BP is a brilliant company, with unmatched expertise in drilling for oil in the deep places of this. So how unlucky was it, when that oil spill thing happened?
Or maybe bad luck doesn’t come into it. Maybe BP was an accident waiting to happen. Maybe it took the Gulf of Mexico debacle to change the culture at the company.
One thing we can say is that such an event could not have been predicted by an outsider. Indeed it would seem it was unpredictable from insider’s point of view too – unless we have the benefit of hindsight. So there is not much investors can do about predicting such situations, other, that is, than in making sure they are suitably diversified.
The same principles might apply to pharmaceuticals. As was pointed out the other day, the pharmaceuticals industry represents a huge opportunity, and few would argue that GlaxoSmithKline (GSK) isn’t one of the stars of the sector. See: Why Pharmaceutics remain among the best investment bets
But now it has run into a wall, or is that a Great Wall?
The finance director of GSK China, Steve Nechelput, has been banned from leaving China. The scandal relates to allegations that GSK has transferred money into travel agencies to bribe Chinese doctors.
Four Chinese executives at GSK have been taken into custody, but of course the media are preoccupied with the fate of the British Mr Nechelput.
“This case should serve as a warning to other Chinese companies and their transnational counterparts that they must abide by the law when promoting their products,” said an article on the ‘China Daily’ web site.
In China there has been a blaze of publicity, with GSK condemned and found guilty by the court of public opinion.
Then again, sales into China make up a small proportion of the global GSK business, although the company has set up research facilities in the country, and this may be more important to the company than sales into China – at least in the short run.
The truth is that GSK is almost certainly not unique, other companies and indeed other pharmaceuticals are busily engaging in corruption (that is assuming GSK itself is guilty, which it may not be, of course). Maybe the problem for the giant UK business is that it was just unlucky to have been picked out, or maybe that is the inevitable price you pay for being one of the world’s largest companies.
But bribing Chinese doctors is not only illegal in China. It is illegal in the US and the UK too. And that is where things get dangerous.
It makes no sense for authorities to pick on one company when the corporate world may well be full of businesses engaging in similar practises. But then again GSK is seen as British, and as we all know in the US that makes things different. When a US firm follows bad practise it gets punished in the US, when a non-US firm follows bad practise it can get pulverised.
Central bankers peak, and markets relax
This is what Bull and Bear stated on June 20. “[Yesterday] Mr Bernanke said that if, and let’s emphasise the word if, things continued to improve, the Fed will reduce QE later this year (September being the likely month), cease altogether next year, and that interest rates may go up in 2015.” Markets panicked over Mr Bernanke’s comments and, returning to Bull and Bear 20 June, this is why: “Because the US will tighten monetary policy if there continues to be good news, let’s emphasise this good news, on the US economy.”
Yesterday (17 July), Ben clarified. He said the course of US monetary policy was not pre-set. If the US jobs recovery doesn’t continue, or if the GDP data turns out to be disappointing, then the Fed may start loosening again. So did he say anything substantially different from what he said on June 19?
But what Ben did do is introduce a new word, and that new word was pre-set. It vies for the title of word of the week. The markets loved the word, and they bought when Mr B coined it, making rather a lot of coins in the process.
But has anything really changed?
As if to try to prove that the pen is mightier than the sword – or at least that central-bank-speak can be mightier than quantitative easing – the Bank of England also tried to introduce a word of the week.
Actually, if you want to be anal about these things, the Bank of England really introduced a new phrase (but let’s cheat the rules of grammar and introduce another hyphen) – forward-guidance vies with pre-set as the word of the week.
What the Bank of England is now saying is that it may not embark on a new round of QE, but it will if the markets push yields on bonds much higher. So the markets respond by saying, right we’d better stop selling bonds then, and guess what? Yields on bonds fell as a result.
If QE is a weapon of mass financial destruction, as some say it is, the Bank of England is now using the threat of it as a kind of deterrent against financial detonation.
Many are praising Mark Carney to the heavens. He has managed to get bond yields down, sterling up, and just by uttering the word forward-guidance.
Then again, whether things will carry on like that is not – to coin a phrase – pre set.
Barclays stockbrokers: investors give the thumbs up to FTSE
Which way next for the FTSE? Barclays stock brokers has been asking clients. So it ran a poll earlier this month. It turns out that 70 per cent think the FTSE is well positioned for recovery and 8 per cent believe the FTSE has bottomed out. However, not all investors agree – almost one quarter (22 per cent) said they think the FTSE has further to fall.
Chris Stevenson at Barclays Stockbrokers said: “With market confidence returning to the FTSE, a large number of clients expressed a positive view on how the index will perform. The FTSE 100 index has gone through a turbulent period in the last two months, reaching highs of 6,840 points in May before plummeting to 6,029 in late June, close to its 2013 low. It is therefore encouraging to find that despite the uncertainty that comes with volatility, so many of our clients hold a positive view. However it’s also no surprise that some investors anticipate another fall to come. Market movements aside, our clients clearly chose to take advantage of the weaker market prices in June, as we saw the ratio of purchases to sales increase, compared to earlier this year.”
Barclays in energy fixing fine, but what will follow?
And so Barclays was fined $453 million for allegedly manipulating energy prices. The bank says it will vigorously defend “this matter,” but who do you think will win this one over in the USA: the US regulator or a British bank?
The regulator says it has proof; that it has emails from traders boasting about their influence. Barclays says the emails are merely evidence of bravado.
In one email exchange between Barclays’ trader Scott Connelly and a colleague, an email to Mr Connolly said: “You going to have fun with the index all month?” In another email, Mr Connolly said, damningly, or so they say: “Crazy – I love it.”
Does that sound like manipulation or was it just those whacky boys engaging in high jinks? It matters not what you think, it is hard to believe a US court will find in favour of Barclays.
And by the way, LIBOR fines for Barclays are now back on the agenda too.
You can’t predict how this will turn out, not precisely, but you do know that in a battle between the US regulator and a British company, the British company will come second.
Companies in the news
Bull and bear: Both Tempus at the ‘Times’ and Questor at the ‘Telegraph’ were in holding mood today. Long River Partners wants to buy Severn Trent, but Severn Trent wants more. Questor says it can see Severn Trent’s point, but with shares trading at a multiple of 19 said: “hold”.
Tempus took a look at Smiths Group. The company is in the detector business, involving sensors at airports for spotting weapons for example. But it has hit contractual issues. Tempus said: “The good news is that the problems relate to three contracts dating back to 2010, so these are legacy issues rather than new ones. The bad is that it will take £15m off profits for the financial year to the end of July, for which consensus had been £562m at the operating level.” It concluded: “hold”.
Bear: Meanwhile, Lex at the ‘FT’ took a look at Barclays. The markets don’t seem to be too concerned by the latest legal wrangling, but Lex reckons they may be too nonchalant.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees