Brian Tora: Fudging the numbers on RBS


The recent Mansion House speech certainly sparked some interest amongst investors. Last year it was the governor of the Bank of England who put the cat amongst the pigeons by suggesting interest rates may rise earlier than expected. A year on and there is still no sign of a raise taking place anytime soon. Still, the Chancellor George Osborne did not disappoint with the measures foreshadowed. The Royal Bank of Scotland stake is to be sold, along with more of Royal Mail, and it is to be made illegal for governments to spend more than they raise in taxes.

This latter measure sounds fine in theory, but will it really work in practice? Generally we do not run a budget surplus, yet we survive somehow. Perhaps the arithmetic will be fudged, rather as it appears to have been in terms of whether the RBS sale will crystallise a profit. The Chancellor claims it will, but the price remains below the level at which the Labour administration conducted its taxpayer funded bailout. Ah well. Lies, damn lies and statistics again, I fear.

There have been some other interesting developments recently, with rumours abounding that drinks giant, Diageo, could be on the receiving end of a bid. Rather than another beverage firm seeking to consolidate in the sector, it seems that a private equity house might be aiming to drive more value out of this wide flung business. If indeed a bid materialises (and the rumoured bidder has form in this field) then it is more likely to be in the guise of a break-up of Diageo’s many global brands. With Warren Buffett a possible participator on the sidelines, nothing should be ruled out.

Not that this news sparked much action in the market, other than in Diageo’s shares, of course, though bid activity is usually a driver of markets. There had been a dullish tinge to trading recently, with investors doubtless weighed down by Greek uncertainty. A slowdown in China hasn’t helped, with the latest economic statistics indicating a soft consumer market and a sharp slowdown in imports. China’s growth looks likely to slip to sub-7 per cent this year, but it is the immediate predicament Greece faces that is probably the greater influence.

The new government in Athens certainly raised the stakes by failing to meet a payment due at the beginning of June. All eyes have been on the continuing discussions, with significant sums due back to the International Monetary Fund by the end of the month. Without further bailout funding, Greece will not be able to make these repayments, but those in the European Union who will have to put up the cash remain anxious to see further reforms as a prerequisite. The good news is a deal does appear to be closer.

So far the one aspect of all this that appears to have universal agreement is a desire to keep Greece in the single currency zone. Presumably the Greek leaders are worried that the fallout from an exit will be too painful for the population that has only recently placed them in a position of power. Other eurozone members, most notably Germany, will be concerned that the first country to leave the single currency bloc could undermine confidence or, even worse, encourage other nations to explore the possibility of life outside the euro. We must view this as a plus.

There has been little else for investors to get their teeth into, with corporate news thin on the ground. Such economic news as we have seen is best described as mixed, while the shakeout in the bond market has probably served to refocus attention on equities. Nothing in the investment business is ever straightforward, but at least a solution to the Greek problem – if it arises – will serve to eliminate one uncertainty.

Brian Tora is an associate with investment managers JM Finn & Co.