Global Investing: A tale of Brexit, sterling and UK bank shares

It is no coincidence that Brexit angst has coincided with the lowest allocation to UK equities since the global crisis, even though the City consensus is hugely 'Remain'.

Sterling selloff in the world currency markets and the sheer populist appeal of Boris Johnson suggests the world should not rule out a geopolitical shock that will unnerve financial markets and lead to the mother of all rate cuts at the Bank of England. If Britain votes to leave the EU, the only currency I want to own is the Swiss franc and gold, though even the yen could surge higher to 94-96 and spell the nemesis of Abenomics. Brexit will also mean recession in the UK and the end of the Cameron/Osborne era at the helm of Tory politics.
Sterling, naturally will be an immediate sell on Brexit possibly to as low as 1.25 on cable. Gilts would then share the fate of the German Bunds, with the 10-year Bund yield a mere 0.16 per cent! I cannot ignore the sheer mood swings of the UK public (from Clem Atlee to the Scottish referendum to the last general election!) in an age of austerity, angst and fears about an influx of Turkish migrants. A British exit would be an ominous precedent for the European Project as German, Italian, French and Spanish political risk has again begun to rise. The AFD/Pegida, National Front, Cinque Stelle and Podemos are all anti-EU populist parties.
It is no coincidence that Brexit angst has coincided with the lowest allocation to UK equities since the global crisis, even though the City consensus is hugely "Remain". Still, this crowd consensus reflects class interests, not the grim realities on High Street. A Remain vote is, of course, nirvana for Stagecoach, Win Morrison and Lloyds Bank, the most England-centric of all UK clearing banks. It saddens me that so many owners of London property have no clue about the coming meltdown in prices. At the very least, a short in Great Portland or Persimmon is a hedge!
Any investor in UK banks has witnessed unmitigated trauma in the past decade. I was in London in June 2007 and witnessed the depositor run on Northern Rock, the first bank run in the sceptered isle since Victorian times. I was also in Edinburgh for a Walter Scott conference in October 2008 but did not meet Alex Salmond in the gala dinner in the Museum of Scotland since Sir Fred the Shred's RBS, Scotland's most overrated champion since Bonnie Prince Charlie, went belly-up. This was once the world's biggest bank, not some provincial building society schlock outfit.
2016 has not been a great year for investment ideas in UK banks. My last successful big idea was a short on Standard Chartered at 1,500 pence, long covered with a juicy profit. Like Mick Jagger, I can't get no satisfaction from HSBC and was plain wrong on Barclays, with both Jenkins and Jes unable to move the share price.
The next big variable for capital return and div payout is the Old Lady (the one in Threadneedle Street, not Buck House!) stress test, which are more mission critical to this sector than even the Basel 1 concordat. I expect nothing much from HSBC, RBS and even Barclays, despite the exit from Africa and the end of Bob Diamond's capital intensive, structured finance excreta.
In any case, the 8.3 per cent HSBC yield screams dividend cut to me and I still doubt if the stock price reflects the lowest growth in China since 1990, rising corporate defaults in the Middle Kingdom, five-year lows in the yuan and the rise in South China Sea geopolitics black swans. Lloyds, now the classic Little England bank, will outperform its peers as it will generate excess capital - and paid a special dividend to shareholders, unlike RBS.
Lloyd's decision to buy back its expensive post-2008 enhanced capital notes will save £1 billion at a time of epic low interest rates. The surcharge on bank profits and stamp duty on buy to lets and a flattening sterling yield curve is not a good omen. This is the reason Lloyds is the ultimate UK value bank as yields rise to seven per cent, as Senor Horta Osorio wants to double the payouts. I am stunned by the turnaround in StanChart as it rebuilds Basel Tier One to 13.1 per cent yet still trades at 0.6 times a book, a 30 per cent discount to HSBC. Will StanChart rise to 600 pence? Yes, despite the bearish selling until June 23.
The writer is a global equities strategist and fund manager.