Investec trading update

Sometimes it comes across as arrogant to blow your own horn but in this case I have to say we have been right so far. I'm talking about the Investec trading update which came out yesterday morning which indicated that headline earnings per share were expected to be down by 22%-27%. This is what I said when I analysed their full year results last year in May.

"This is why we don't invest in the stock. Too risky and volatile. In the capital markets division they use all sorts of fancy financial instruments which have the potential to go very wrong as we saw during the financial crisis. Banks can be good businesses if they stick to the old fashioned banking model but with such high cash reserves they get tempted into seeking higher returns. Remember that quest for instant gratification I spoke about?"

It's been a tough period for Investec who found themselves at the heart of the financial crisis and are now being further regulated as a result. This is what they had to say about conditions in the sector.

"Volatile markets and low levels of activity have characterised the second half of the group`s 2012 financial year. While earnings from principal activities are expected to decrease substantially, the Specialist Banking businesses are expected to benefit from growth in both margin and fee income. The Asset Management and Wealth Management businesses continued to see net inflows and the proportion of revenues derived from the group`s non-lending activities has continued to grow."

They are on an absolute tear to grow that asset management business where they see the future of the company. That makes sense, less regulation and good margins. The UK business seems to have grown slightly which is good to see while the South African business will be pretty much flat. The Australian business is going to make a loss, sponsoring the Super Rugby there is obviously not enough.

"While the pace of economic recovery varies across the world, and the regulatory environment remains challenging, the significant reshaping of the business that has taken place over the past few years ensures the group is well placed to benefit from any improvement in the level of economic activity."

The company is certainly offering value and no one can doubt the Investec management team who have done so well in the past. I just think they operate in a very difficult sector at the moment. The asset management shift is a good call in my opinion but it is still an investment bank in a very tough environment. I would stay away from this whole industry.