In a stunningly logical twist, companies making a living from trading on the stock market are feeling the pinch amid a glum market with barely-there trading volumes.
Collins Stewart, the country’s biggest broker, issued a fall in profits and a grim warning that there is no hope on the horizon as all of 2008 is forecast to be poor.
As my colleague Ben Traynor notes in today’s Fleet Street Daily, the phrase ‘victim of the credit crunch’ is bandied about a lot in the papers. As Ben discusses, this is invariably a misnomer as many firms are sneakily using the economic downturn as a smokescreen to hide their less obvious shortcomings. However, I think I’m OK to describe Collins Stewart as a ‘crunch casualty.
Make that catastrophe. Shares in the bowed broker have fallen 44% since the beginning of the year. Revenues for the four months ended 30th April fell to £57.6m from £73.1m the year-earlier. Profit figures were not disclosed.
The update reads much the same as the hundreds of other negative updates from banks and brokers over the past few months:
‘We [company name] expect the financial markets to remain challenging during 2008, particularly in [worst performing sector (a lot of competition here!)].
‘With a [sound / solid / substantial] balance sheet and a [sturdy / robust / sure] cash position [company name] is well placed to weather the current economic storm. The board endeavours (they seem to like this word) to emerge from the credit crunch with an even stronger franchise.’
Or something like that.
As the biggest underwriter of small-scale public offerings, it is the capital markets division which has been most slippery for Collins Stewart. The firm raised 32 percent less in 2007 than the year before and advised on half the number of deals as cheap debt became a scarcity in the latter half of 2007.
Wealth management performed ‘solidly’ and securities ‘satisfactorily’ according to a regulatory statement, but full figures will not be released until after the summer. If they are anything like the rest of the sector, and they have been so far, expect more bad news.
Brokers should synergise
It’s not just the brokers... fund managers and financial advisers are reporting what looks to be their worst year ever. Earlier in the year, stockbrokers and fund management groups reported a 10% hit in the value of stock ISAs compared with 2007.
The Investment Management Association reported inflows for the first quarter, often termed the "ISA season" significantly worse than the same quarter a year ago, down 33 %. Market fears have extinguished the stock appetite among Britain’s lucrative private investor market.
The safety of cash accounts has lured individuals and institutions away from the market until some sense of direction returns. With trading volumes at their lowest ebb for 2008, as there seems to be little belief backing the recent pick-up in the stock market.
What does a company do when the market stops growing? It grabs market share, or it tries to. Consolidation is the order of the day, but attempts thus far have been fruitless.
Blue Oar, the London-based broker, tried and failed to buyout WH Ireland. The group ha also confirmed that it is not going to attempt a hostile takeover of WH as the firm had refused to even meet Blue Oar.
Undeterred, Blue Oar is still looking to top up its headcount and buyout some more friendly partners. "It is our intention to grow our business and part of our strategy is to acquire other people," said the firm.
Arden too, has ended talks with Cenkos Securities over a possible tie-up. There was a lot of buzz in April as Arden went aggressive, offering a nil-premium all-share bid. Not terribly compelling. Unsurprisingly, price was the main sticking point.
In a statement, Arden said all discussions with its much larger rival had ended but that other parties were interested, showing signs that the consolidation story still has legs. Elsewhere, Evolution Group is said to be on the cusp of announcing a deal with Panmure Gordon.
Whilst being the best move for brokerages as businesses, it’s not terribly alluring as an investment opportunity. So should we investors stay out of the whole sector? Not necessarily...
A much spreadbetter investment
For anyone watching the ascent of City Index and CMC Markets, the writing has been on the wall for a long time. Relative new boys on the block, Spreadbetting and CFD firms, are doing a fine trade through the turmoil as volatility plays into their short-term trading service.
Market leader IG Group reported soaring revenues in March and this budding style of stock market trading has captured the public’s imagination while the old-school brokers struggle to bring in the business.
Spread betting firms have been prospecting amid the market volatility, traditionally good for traders. The company posted first quarter revenues 55% higher than the previous year at £46m.
And it’s not just in the UK... the group is beating the crunch all over the world. Non-UK operations now contribute more than £1m in revenue a month and all continue to grow rapidly, said the company.
With price targets topping 450p, IG Group looks to be a clever way to offset losses in traditional broking. However, there is a far simpler way to capitalise on the credit crunch and it can be found in the recommendations of the UK’s oldest investment newsletter
Fleet Street Letter.
This AIM listed finance group stands to make a packet as the tremors filter through the financial system and into the real economy...
Theo Casey
