17th August 2012
As ever, the first point to make is that no company, however big or successful, is immune to the occurrence of leftfield events such as this. Obviously nobody was expecting this to happen to a company that for years has been a big favourite among investors but, now that it has, we are seeing the start of what might be termed ‘the BP effect'.
As we discussed in BP oil spill two years on, when potentially significant events come out of nowhere, the market starts imagining worst-case scenarios – and it can have quite an imagination. For Standard Chartered, one worst case is it loses its US licence, which would be absolutely catastrophic for it as a business. Although the bank operates primarily outside the US, it still needs the right to clear in US dollars.
In the absence of any definitive statement from the bank and/or US regulators, this sort of speculation could now run and run. However, such a statement is unlikely in the short term, which creates a vacuum within which the stock market can cook up whatever hypotheses and conjecture it wants.
For value-oriented investors, however, these situations can – not inevitably, but potentially – to offer an opportunity as other investors worry about the well publicised risks without thinking about potential rewards. Our job is to weigh up the risks, as objectively as we can, and try and make a rational appraisal – if such a thing is possible – of, first, what has actually happened and, second, what the potential consequences might be.
We will then continually check to see if at any point there is a material disconnect between what we think the stock is worth and how it is being valued by the market – and how much comfort that gives us against the bad things that could actually happen.
None of this is to say that investors have to come to a decision one way or the other – and deciding that there isn't sufficient data to come to a definitive conclusion is a perfectly valid judgement in itself. However the situation Standard Chartered now finds itself in is one that as value investors we certainly won't ignore just because there is uncertainty and potential risk. It is a question of monitoring the situation and, if an opportunity does happen to arise, not letting the ‘noise' of what is going on around you prevent you from pursuing your chosen course of action.
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