Are you old enough to remember when banks were considered boring and safe? If so, maybe it's time to consider a bet on Britain's battered financial sector.
In the wake of the Brexit vote, shares of Lloyds Banking Group, Barclays and Royal Bank of Scotland all plunged, presumably because of their heavy focus on the domestic British banking scene. (In contrast, HSBC and Standard Chartered both sustained far lighter losses, presumably because of their larger tilt toward Asian markets.)
To some degree, the losses among Britain's largest domestic banks make sense. No one knows what the future will hold for the UK once its separation from the European Union is complete. But, still, the amount of damage sustained on Friday seems excessive. Lloyds shares lost 21 per cent of their value, while stock in Barclays and Royal Bank of Scotland both slid about 18 per cent.
Has Brexit really knocked down the value of these financial giants by a fifth? Well, maybe. JPMorgan analysts estimated that earnings of British banks in 2018 could be 20 per cent weaker than previously estimated. Eric Lascelles, chief economist at RBC Global Asset Manager, wrote in a note on Friday that Britain now faces a 60 per cent chance of recession in the short term as businesses and households taper back on spending in the run-up to Brexit.
But keep the big picture in mind. Mr. Lascelles calculates that departure from the EU will trim British GDP by only 2 per cent or so, when all is said and done. Everything else being equal, his math suggests British shares should sustain a long-term hit of only the same minor magnitude.
If you're a patient investor, scooping up British bank shares at their current depressed levels may be a smart move. Just remember the lesson of the past few years: Even the biggest banks may be nowhere near as safe as they appear. Do your own research before buying any of these battered giants.
Three big numbers to note
611 The point decline of the Dow Jones industrial average on Friday, a loss of 3.4 per cent. The TSX lost 239 points, or 1.6 per cent. Nasdaq did worse, with a 4.1 per cent decline - its biggest fall since 2011.
10% Probability of a July 27 rate cut by the U.S. Federal Reserve, as implied by futures trading Friday afternoon. At the start of this month, pricing on federal funds futures suggested odds of a rate HIKE that day was at 52.9%.
7% Closing level of the STOXX 600 European index Friday. Losses were led by peripheral bourses, with London's FTSE 100 outperforming. It closed 3.2 percent lower on the day and nearly 2 percent higher on the week.
Britain's decision to depart from the European Union has sent the loonie into a tailspin. Our market strategist Scott Barlow explains that the new risk-off era that seems to be underway isn't going to be kind to our domestic currency.
Canadian financial institutions were swept up in market volatility following the U.K.'s decision to leave the European Union, amid concerns that their investment banking, wealth management and insurance operations would suffer from what could be a protracted period of economic uncertainty. David Berman reports that some observers believe the turmoil could continue as the implications of the UK decision reverberate through the EU, with the more exposed players bearing the brunt.
This isn't a Lehman moment, even though the market reaction has been severe and swift, says David Rosenberg. The highly followed economist thinks Friday's selloff likely will prove overdone and a buying opportunity, especially in cheapened-up U.K. assets.
One of the companies that saw its shares take a dive in the wake of the oil price decline was TransForce Inc., a Montreal-based transportation firm that operates across North America. But it's stock has more recently rallied as the company engages in rigid cost-cutting and a refocus on sectors of the business that were not energy-related. Gordon Pape takes a look at where the company now stands.
Cominar Real Estate Investment Trust
Doing some Canadian REIT hunting? Here's a smart screen that looks for REITs with strong yields and reasonable valuations. Cominar REIT ranks No. 1. The trust has a yield of 8.6 per cent and a forward P/E of 9.7, which is reasonable compared with its peers. And for those looking for more stock screens from our panel of experts, click here.
An investing present
Ready for a surprise? Scott Barlow says a Citi index for Canada has proven to be an effective leading indicator for the S&P/TSX composite. He said it looks like energy, materials and industrial stocks have the most to gain.
RIP, five-year GIC?
Rob Carrick suggests it may be time to lock in guaranteed investment certificates for a shorter term. Extra yield can be hard to find these days.
A different type of crisis
In the event of a U.S.-style housing price carnage, the Canadian financial system is poised to withstand a full-scale crisis, according to Moody. Scott Barlow looks at the difference between the pre-2007 U.S. housing bubble and the current state of the Canadian real estate industry.
A new retail bull market
While Amazon Inc. and other online retailers continue to grab market share from malls and other physical retailers, U.S. mutual fund managers have found an overlooked part of the boom: warehouses. U.S. REITs in the sector are becoming more and more popular.
Ask Globe Investor
I'm a new investor and I'm now seeing my money take a big loss from when I started a couple of weeks ago. I own about a dozen stocks and until now they were making me money. What do I do other than panic?
You may not think so now, but this is a good experience for you as a new investor. People that are new to investing and see their investments go up, without experiencing a market correction, develop a mentality that it is really easy to make money. They tend to get over confident and can become careless investors - choosing investments without doing the proper due diligence and thoroughly assessing if the investment is within their risk tolerance.
The best advice I can give you at times like this is to stay focused on your time horizon, and reassess the quality of the stock, mutual fund or investments you have made. I'll assume that you bought things of quality and with the intention of owning them for a long time. If that is the case then continue to own them. The worse thing to do is panic and sell.
When people own their house or a rental property and the housing market has a pullback they wouldn't rush to sell that house. It takes time, preparation and a lot of effort to do it. Exercise the same resistance for your investments during a market correction. If anything, see a market decline as an opportunity to buy either more of an existing position or other quality investments that previously were too expensive to buy.
Everyone likes a sale, so see a market correction or decline as such.
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
Investing quote of the day
"Given the volatility, the markets will be unpredictable for the next several trading sessions. With that said, we don't think this sufficiently systemic to throw the global economy off track ... The idea would be to buy things that are high-quality that are getting dragged down with the rest of the market." - Dan Ivascyn, Chief Investment Officer at Pimco
What's up in the days ahead:
David Milstead on Monday will explain why an investment in Brazil's Embraer is an interesting hedge for Canadians who may end up investing, involuntarily, in Bombardier. And Brenda Bouw takes a look at Stingray Digital. The stock is up by double digits this year, all four analysts who cover it have a buy rating, and pension manager Caisse de dépôt et placement du Québec just bought a whack of new shares. Should you be buying in?
Check out the Globe Investor calendar for economic and corporate earnings events in the week ahead.
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Compiled by Darcy Keith and David Leeder