Occupy Wall Street: Just Noise?

BCA Research, Occupy Wall Street

According to a Global Investment Strategy Special Report, the Occupy Wall Street movement symbolizes the fact that political extremism is rapidly becoming mainstream.

The Occupy Wall Street movement is rooted in the secular decline of the American middle class. Judging from the GINI coefficient, the distribution of income is more unequal in the U.S. than OECD countries in general. Moreover, real wage growth in the U.S. has stagnated since 2000, while education and healthcare costs have soared. High education costs have serious social repercussions since they are a strong drag on upward class mobility. While it is currently impossible to boil down the Occupy Wall Street movement to a single issue, it is a symptom of deepening social strife, political polarization and spreading discontent in the U.S. These are ingredients that, if left unchecked, can lead to potentially radical shifts in policy made to score political points with the extremes, rather than to address underlying economic problems. Both the extreme right and left of the political spectrum will be energized by genuine social discontent – which can nonetheless translate into completely opposing policy preferences – leading to further political polarization. If the clash between left and right intensifies, policy making will become even more difficult. This would mean a heightened political and policy risk premium on equity prices among all G7 markets.

Recapitalizing European Banks

BCA Research, Recapitalizing European Banks

The tangible common equity to total assets measure of bank solvency suggests that French and German banking sectors are most in need of capital.

To measure the solvency of a bank in times of stress, it is vital to only count the simplest form of capital that can absorb losses – tangible common equity. In other words, goodwill and complex forms of capital should be excluded from the numerator of any capital adequacy ratio. Also, when Europe is experiencing a sovereign debt crisis it is ludicrous to treat government bonds held by a bank as zero-risk assets (as the Core Tier 1 Capital ratio does). In other words, government bonds should be included at full weight in the denominator of the solvency ratio. On this basis, it is easy to identify which individual banks and national banking sectors need the most capital. In addition to Dexia, which has a tangible common equity to total assets ratio of 1%, French and German banks stand out as the ones most in need of capital injections. Other euro area banking sectors are better capitalized, but have more exposure to their own distressed bond markets. Importantly, irrespective of how banks raise common equity, whether from the private sector, their governments or from the EFSF bailout fund, it is dilutive to existing shareholders and a drag on their share prices. Meanwhile, U.K. banks do not have such a domestic bond problem and are relatively well capitalized. What is more, they started raising capital over two years ago. Therefore, our European Investment Strategy continues to overweight U.K. bank stocks relative to their euro area peers.