Investors should be prepared for Lloyds reprivatisation

FEW could have imagined we would be treated to the sort of headlines we’ve seen over the past few days. We’re now used to a daily dose of doom and gloom, circling around the seemingly never-ending European recession and a sluggish UK economy that can’t seem to get beyond stagnation. Anything that suggested otherwise has been dismissed as either a mistake or a complete one off. At the same time, people have been dismissive of the equity market rally that continues to go from strength to strength. But it has already, in only a matter of days, shrugged off what might have been a substantial sell off.

For once, the equity markets might be getting it right. After the long bank holiday weekend, the UK was welcoming some slightly more positive business headlines, suggesting that the economy is stronger than previously thought. We’re still a long way from the sort of growth we experienced back in the mid-noughties (although a great deal of that was the result of considerable government spending and the significant role the state played in providing employment). But there are now signs of the odd green shoot, as reported by the Confederation of British Industry just this week.

This is good news for many reasons. Not only is the economy improving, but the considerable investment that we as taxpayers have put into two of our largest banks is starting to look like a good bet after all. Lloyds Banking Group shares recently surpassed the price (61p) the coalition set out as the taxpayer “break-even” level.

One of the golden rules of investing is not to tell the market when you are going to sell your stake in anything. This is a harsh lesson that was learnt by a previous British chancellor Gordon Brown, who pre-announced a plan to sell a substantial chunk of our gold reserves. This led to the price falling and therefore presented one of the best buying opportunities ever. And, as they say, the rest is history, when you consider what the price of gold is today.

If our current chancellor can learn anything from this, it is that he should not prep the market before selling the substantial stakes the taxpayer owns in Lloyds and RBS. Maybe he’s better off discretely selling off the government stake piece by piece right now. I refer in particular to Lloyds. The market could seamlessly absorb these holdings, and the government could then put the proceeds to good use via other forms of stimulus for our economy. Now we all know that politicians don’t have the finest record of spending taxpayers’ money very wisely, but often a bird in the hand is worth two in the bush.

Certainly, our clients seem to think this, having been taking a bit of profit from their long positions on Lloyds since the share price broke above break even. But overall, they remain bullish on bank stocks more generally – another indication that confidence in the wider UK economy is building.

Angus Campbell is head of market analysis at Capital Spreads. You can follow him on Twitter @angusjmcampbell

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