AFTER eight months of holding onto his 1.5 per cent stake in Barclays, one of London’s top hedge fund managers announced last week that he has sold his stake in the high-street bank, which has risen in value by 550 per cent over the period.
Crispin Odey, head of Odey Asset Management, cited uncertainty over upcoming rulings from the European Commission, which have shaken his confidence in the UK banks. His divestment follows that of the Qatar Investment Authority, which last month sold £1.3bn of its investment in the bank.
Barclays has been one of the few British high street banks that has managed to escape from the recession without government help and virtually unscathed. At its lowest ebb, the share price slumped to little more than 50p but its perceived strength relative to its struggling peers RBS and Lloyds Banking Group saw Barclays’ share price rise strongly to close up at 2.13 per cent yesterday.
So with two high profile stakeholders selling their share of Barclays, should contracts for difference (CFDs) traders be looking to do the same and, if so, where should they put their money?
Certainly, the sharp rally in Barclays’ share price might well have prompted some traders to question whether the stock has over performed in recent weeks and whether it could be due a pullback.
At the moment, traders are waiting for next Tuesday when the bank gives its third quarter trading update, which is expected to provide more clarity about how it has performed and the outlook over the next six months. The earnings report is certainly important for the bank’s share performance.
Morgan Stanley analyst Steven Hayne certainly thinks that Barclays could continue to perform well and remains overweight on the stock ahead of the trading update. “We keep our price target at 420p (32 per cent implied upside) looking to 2012. For the third quarter, we pencil in £0.8bn of pretax profit,” he says.
However, Joshua Raymond, market strategist at CFD-provider City Index, said that investors might want to take their profits off the table ahead of the report and consider whether Barclays is really going to recover: “There’s a general acceptance in the market now that this third quarters earnings season might have already been priced in. If earnings aren’t as good as expected then there is a risk that the market will be disappointed.”
Indeed, there is a chance that Barclays will disappoint. The lesson from the third quarter earnings season in the US was that while some banks reported better-than-expected earnings results, by no means all are flourishing. UK banks are equally unlikely to all report above-consensus figures so there is a chance that Barclays may not meet expectations.
Whatever the earnings figures, traders might be better to have a neutral position on Barclays when the earnings report is released and then sit back to reassess whether it would be worth buying more of the stock.
Not only will the upcoming earnings report encourage caution among traders, plenty will also be concerned that the whole sector will be shaken up by the uncertainty caused by the EC. This could have a knock-on effect on Barclays and the other two London-listed banks – HSBC and Standard Chartered – that have not needed to go cap in hand to the government for support.
But for those who are still wary of taking a punt on Barclays, there are other options, says City Index’s Raymond. While you might think that the very presence of Lloyds Banking Group and RBS in the UK banking sector might make a sectoral CFD too risky, Raymond says that a banking sector CFD could be useful. You could either make a straight speculative trade using the bank sector CFD or you could look to hedge a long position on Barclays with a short on the wider sector to offset potential losses.
Equally, you could look to take at least some of your money out of Barclays and go long on other banks to diversify your exposure: in that case your best bets are Standard Chartered and HSBC. These have also seen their share prices surge since the first quarter of the year – HSBC has risen 95 per cent and Standard Chartered has surged 156 per cent. They have escaped government aid and have a strong exposure to Asia, which is expected to bounce back strongly.
Braver CFD traders may want to take a look at both RBS and Lloyds. While you might be tempted to entirely avoid those banks which are in the asset protection scheme because they are too risky, don’t forget that higher risks do normally go hand-in-hand with higher potential rewards. It is a double-edged sword, so investors looking to act on their view of the part-nationalised banks should ensure they have guaranteed stop losses in place and reduce their stake sizes so they are not exposing themselves more than they feel comfortable with.
Crispin Odey and the Qatar Investment Authority have decided to cash in on their Barclays’ stakes ahead of earnings and EC rulings, and CFD traders might be wise to do the same. But you ought to use the opportunity take your profits off the table in order to reassess your position rationally and look for further opportunities to get back into the market.
CFD PROFILE COPPER (HIGH GRADE) FUTURES
Size of contract: 25,000lbs
Margin Requirement: $7,762.50 per contract
Trading hours: 24 hours except 10.15pm-11pm UK time
(Information from IG Markets)
Yesterday, Marino Valensise, chief investment officer at Baring Asset Management, said that “copper is becoming increasingly attractive, given it is the only metal that can be used for the ongoing electrification of the power grids of many emerging countries”.
As investors have become more confident about the state of the global economy and the pace of the recovery, copper has started to regain some of the losses that it endured in the wake of the financial crisis.