6th May 2013
Cutting your losses on an investment is always a risky business – indeed it is almost as risky as investing in the first place. If you sell out at or near the bottom of the market, the risk is that you are crystallising your losses. Every investor with a little bit of experience knows this. Yet Governments can do it too. Remember Gordon Brown’s notorious gold sell off.
But unless an investment is an absolute lost cause, it often make sense to hold on until its fortunes improve, whether because of the market and/or economic cycle or in the case of a share because the management starts putting a firm’s house in order. That is why Mindful Money is a little puzzled at reports that the Treasury is keen to see RBS privatised as early as next year, probably before its share price has recovered to its full potential.
Think tank Policy Exchange is advocating the move as reported in City of London newspaper Financial News this week which may help stiffen Treasury resolve about the plan. The think tank wants to give taxpayers a direct stake. The board of the bank also say RBS is ready to start preparing for privatisation too.
As a subtext to the issue, there have been accusations that the Labour Government paid too high a price for the part nationalised and suggestions that the Government would do well to unburden itself and cut its losses. Other commentators and experts. mostly but not exclusively from the left and centre left, suggest that RBS should be broken up into a series of regional banks to help foster a revival in British business and industry. A final proposal would see RBS broken up into a good bank and a bad bank containing underperforming assets.
What is often forgotten is that the 81 per cent share held by the Government did not fully take the bank into public ownership. Intriguingly this leaves a rump shareholding still on the market so, to an extent, we can see how the market views the proposals. Shares went down on the news quite dramatically falling 5.5 per cent to 289p late last week, though commentators are now saying this is a buying opportunity.
The market may well be right and underlines why we are not so sure whether the Treasury risks being a little hasty. The current level of the share price represents, roughly, a £19bn loss on the £45bn ploughed in by the taxpayer during 2008 and 2009. We can see the political benefits of being seen to put things back to normal, but not much financial benefit. It also fits with the world view of think tanks such as Policy Exchange, but does it really help the country?
We think that unless it can be clearly demonstrated that economy isn’t working because of the RBS ownership structure then the Government share should be a hold until those losses narrow. That applies whether the original price was too high or not. If the privatisation goes ahead, we suspect some time in 2018 or 2019 those buying shares will view them as a great deal, which means the sellers, (most of us) will see it as the opposite.