There is a flaw in the argument proffered this week by Antony Jenkins, the chief executive of Barclays, to justify lifting staff bonuses in spite of collapsing profits. That matters not only to the 140,000 employees of the bank, but also to the 690,000 small shareholders.
Most have stuck by the bank over the seven years of the banking crisis, seeing the capital value of their shares drop by two thirds and their dividends dive by 81 per cent. Many even put in more money in the rights issue last October. In return, the bank has steadily promised them jam tomorrow while bestowing jam today on the executives and staff.
Mr Jenkins argues that pay rates are shooting up for some investment bankers in Asia and North America. To retain talent, Barclays has no choice but to follow the herd if it is to build a “lasting franchise”.
Yet there is something wrong-headed in this. A lasting franchise is not created by rewarding employees today in anticipation of future performance. Clients are not persuaded that their long-term interests are paramount by bankers who can be motivated only by the size of their immediate bonus.
The investment banking division still looks and behaves like a parasitic worker co-operative tacked on to a more conventional company, one that occasionally strikes gold for all, but too often only for itself. If Mr Jenkins feels obliged to pay his traders and dealmakers 13 per cent more when their profits plunge by a third, what on earth will he be required to pay them if they actually deliver? He has embarked on an insane one-way pay ratchet.
The bull case for Barclays is that it has strong franchises in high street banking and credit cards and is ahead of the pack in mobile banking. The shares, at 260p, are on only seven times forecast 2016 profits and trade at an 8 per cent discount to net assets per share of 283p.
The bear case is that the culture has not changed, in spite of the fine words. It is a recipe for eventual shipwreck in the face of increasingly intolerant regulators, clients and public opinion. There are already nerves over foreign exchange manipulation allegations.
Barclays may care deeply about a few of its shareholders. It is, after all, being investigated by the Serious Fraud Office for allegedly secretly paying bribes to the agents of some favoured overseas shareholders. That same largesse does not extend to ordinary investors who backed the bank long before Qatar appeared on the register.
Decisions this week suggest that the self-serving culture has not changed enough. Sell.
Investors rattled by the sell-off in emerging market equities at least can take comfort from the latest analysis of long-run returns from the London Business School and Credit Suisse. Including the recent wobbles, shares in emerging market companies have outperformed developed country shares by about 1.5 per cent a year over the past six decades.
The super-long-term assessment is not quite so promising. Since 1900, emerging markets have delivered average annual real returns of 7.4 per cent, compared with 8.3 per cent for developed markets. Yet when you consider that this longer period included the expropriation of Russian private assets in the 1917 revolution and the collapse of Japan (then classified as an emerging market) at the end of the Second World War, it’s respectable.
The lesson from the LBS research is that investors in emerging markets are usually rewarded for the higher risk with higher returns. Investors in emerging markets do even better when they pick smaller companies and prefer more lowly rated nations, where yields are higher.
One of the most compelling findings in the latest research is the correllation, positive and negative, between GDP growth and share market returns. In essence, choosing stocks in countries with high past GDP growth is merely a recipe for disappointment. Choosing stocks in countries with high future GDP growth results in riches.
Sadly, of course, predicting future GDP growth is a whole lot harder than looking up past numbers.
Reversion to the mean is a powerful force. Shunning countries whose currencies have been strong and where growth has been high, and piling into countries whose currencies have fallen and where growth has been weak, has been a profitable philosophy in the past. Rotation into the most unappetising-looking countries, plus a good dose of nerve and patience, seems to be the answer.
What hasn’t been the answer is to panic and bale out — the apparent approach this week of the hedge fund group Brevan Howard, which closed its $2.3 billion emerging markets fund and waved goodbye to the manager Geraldine Sundstrom after a 15 per cent loss last year.
As Paul Marsh, of LBS, put it yesterday: “You kind of despair of the world when it’s that short term.”
Things are finally looking up for African Barrick Gold. The company, 75 per cent-owned by Barrick Gold of Canada, was floated in London nearly four years ago and has endured a collapse in the price of gold, fatal clashes at one of its mines and eye-watering writedowns.
Yesterday, however, it beat City expectations on earnings and cost control for the full year. Brad Gordon, the Australian in charge, has done admirably since arriving in August. By his own reckoning, he is only just getting going: he says that he has yet to get into the nitty gritty of how to make ABG’s three mines in Tanzania more productive.
Top of Mr Gordon’s in-tray is the Bulyanhulu mine, south of Lake Victoria, in Tanzania. It is, he says, a world-class deposit but “far from a world-class mine”. The $129 million of savings in 2013 were achieved before the company had rolled up its sleeves, mainly through cutting head-office roles and taking an axe to the exploration budget.
The litmus test will be delivery. Mr Gordon, so far, has abided by the maxim of underpromising and overdelivering, but the hard work is only just beginning. The shares, which were marked 5 per cent higher yesterday to 251½p, trade on more than 20 times this year’s forecast profit, so there is plenty of room for disappointment.
They have already doubled since Mr Gordon’s arrival and are plenty high enough until he provides further evidence of the turnaround. With an uncertain outlook for gold prices, there are safer ways to get exposure (such as Randgold). Hold.
Gilts
UK government bonds fell sharply after the Bank of England hinted that interest rates may rise in a little more than a year, as it broadened its guidance on when the economy would be healthy enough to cope. March gilt futures settled 78 ticks lower at 109.36. In the cash market, the yield on ten-year gilts jumped by eight basis points to 2.82 per cent.
Bet of the day
Spread-betters were buying Severn Trent’s share price ahead of a trading update on Friday. Though still a long way from the near-£21 it reached amid bid speculation last summer, the utility’s price has recovered steadily of late as nervous investors recovered their appetite for safer shares. Spreadex offered £17.77¼ to £17.81¾ on Severn Trent.
Tiddler to watch
Stellar Diamonds jumped a further 7.4 per cent to 1.45p after further testing of initial samples of gems from its Tongo kimberlite dyke project in Sierra Leone confirmed their high quality. More sampling results are expected about every four weeks as the company works towards a “definitive feasibility study” of the project later in the year.
