rab/abu dabbab., page-3

re: rab/philip richards/china All roads lead to... China

Look at the make up of the FTSE 100 or the S&P 500 these days and it is clear that the finance sector is riding high. Banks make up a third of the FTSE by market capitalisation - their share prices have tripled relative to the wider market in the last 15 years - and finance firms provide going on 30% of the profits made by all the firms in the S&P 500. That’s up from less than 20% a decade ago. This is all important because it means that most of us will have some exposure to the banking sector: if you own a tracker fund, or indeed any fund that invests in large-cap UK or US shares, you own an awful lot of bank shares. But do you really want them?

The instinctive answer to that question today has to be ‘no’. After all, interest rates are rising (that’s not good for bank profits) and we all remember what happened to the banks last time there was a housing crash in the UK and the mortgage defaults started to pile up: it wasn’t pretty (see cover story - James Ferguson thinks that the sector as a whole should be avoided, but also points to a few banks cheap enough to keep an eye on).

There’s also no reason to think that, because banks dominate the FTSE and S&P now, they will continue to do so. Look at the resource sector. As Philip Richards of RAB Capital points out, back in the 1970s it completely dominated the markets, accounting for 35% of the value of the S&P 500 index in the US.

Yet today, even after the rally of the last three years, it’s only back to 10%. Richards thinks it has to rise further: “I think we have a decade of strong demand for natural resources ahead of us, driven by demand from China and India.” What’s the betting that in five years’ time the index is made up of 30% resource shares and 10% bank shares? I know which sector I’d rather hold.

We haven’t got any specific articles on China in the magazine this week, but China still lies behind most of the stories in some way: the story about the UK banking sector I started with just ended up with a discussion of Chinese oil demand, and everything we write about manufacturing, commodities and the global economy has to take China into account. No business is immune from the China effect. Not even, to their horror, Europe’s truffle hunters. It turns out that black truffles similar to those we value so highly in Europe grow so rampantly in China that the Chinese feed them to their pigs (or eat them with lots of MSG when they are really hungry). Well, they used to, anyway. Now, says Time, despite the outrage from the French (who claim China’s truffles are low grade) they sell them to us - for less than the truffle gatherers of Perigord charge. Is there anything the Chinese can’t do?

d.