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6 Small Business Finance Basics You Must Understand

Bookkeeping is vital to properly managing your business resources. Additionally you will need these records for tax purposes. Whether you DIY or hire someone to keep track of everything you should understand the importance and the basics of bookkeeping.

Keeping good records of operations will alert you to any cash flow issues and potential legal problems as well and keeping all records up to date will make your year-end tax prep much simpler. Here are a few basics that should always be standard practice to keep in your books.

Revenue and Expenses

Every transaction should be recorded. How much is coming in and how much is going out and where is it is all coming from and going to.

Cash

It is important to record the cash your business spends so youll have an accurate number of expenses each year. Writing reimbursable checks and keeping detailed petty cash records are both valid methods of documenting cash expenditures.

Inventory

Maintain records of all inventory! This will help you to forecast for the upcoming year by tracking trends, prevent stealing and misplacing merchandise and keep inventory holdings to a minimum. Dates purchased, stock numbers, purchase prices, dates sold, and sale prices are all relevant information for inventory records. And keep personal and business finances separate!

Accounts Receivable and Payable

Always keep track of what customers owe you and what debts you owe others. Its prudent to record as much data as possible including invoice dates, numbers, amounts, terms, dates and amounts paid or due, balances, and client information in real time.

Employees/Payroll

Hiring even one employee invokes your responsibility to file and pay forms and payroll taxes and each state has its own tax obligations. Employers are responsible for maintaining employee forms such as the W-4 (Withholding Allowance Certification) and the I-9 (Employment Eligibility Verification). You are responsible for maintaining records on withholding, employer matching, unemployment and workers compensation.

If you decide to do your own bookkeeping, you should consult with an expert especially at the beginning to make sure that you are on track. As your business grows, you may want to bring someone on and/or deploy more sophisticated bookkeeping software.

Preparing for Tax Time

With your books in order, prepping for taxes should be a breeze. With everything in order from the beginning it saves you from having to go back to try to figure things out. Don’t forget about the small things like car mileage and petty cash.

Additional Resources

  • Prepare Your Small Business for Tax Time
  • 8 Small Business Tax Preparation Mistakes to Avoid
  • Bookkeeping Basics, Part 1: How to Set Up and Manage Accounts Payable
  • Bookkeeping Basics, Part 2: How to Set Up and Manage Accounts Receivable
  • Introduction to Accounting

Accounting Photo via Shutterstock

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5 Stupid Small-Business Finance Mistakes to Avoid in 2016

By Steve Nicastro

Dont become a small-business statistic.

Nearly half of small businesses dont make it past the first five years, according to the US Small Business Administration. Optimistic owners may underestimate the costs of starting a business, run up too much debt or have bad personal credit that keeps them from getting a business loan. Then its curtains.

In honor of the new year, here are five stupid small-business mistakes to avoid in 2016, so youll still be around in 2021.

1. Not repaying expensive variable-rate debt
The Federal Reserves first interest rate hike in nearly a decade means small-business owners will pay more on existing variable-rate debt, such as business credit cards and adjustable-rate mortgages, in 2016.

Business owners should only borrow money if they are confident theyll earn a higher rate of return than what the debt costs. And thats pretty tough to do with credit cards, which typically carry an annual percentage rate in the mid- to high teens. APR is the true annual cost of borrowing, including all interest and fees.

Think about it: If you carried a credit card balance of $10,000 at 17.75% APR, it just went up to 18% with the Feds rate hike of 0.25%. Youll have to earn an annual return greater than 18% to earn a profit. The debt is costing you $1,800 in interest annually, and if you make a minimum monthly payment of $200 each month, it will take you seven years and seven months to repay the debt in full (and you will have paid more than $8,000 in interest). Ouch.  

Repaying a $10,000 balance at 18% APR earns you a guaranteed 18% annual return on your cash — where else can you earn 18% guaranteed? 

The same thinking applies to adjustable-rate mortgages: If youre paying a high APR, it may be time to repay the remaining debt (if you can) or refinance into a fixed-rate mortgage at a lower rate, but only if your expected savings outweigh the costs of refinancing.

2. Neglecting your personal credit
In a lenders eyes, poor personal credit indicates you dont handle your finances well, so you likely wont handle your business finances well, either. Improving your personal credit score can increase your chances of landing small-business financing.

It starts with making all payments — credit cards, student loans, car loan and mortgage payments — on time; payment history makes up 35% of your credit score. Its also wise to keep your total debt low in relation to your credit limits, as credit utilization comprises 30% of your score. In general, you should keep your credit utilization below 30%. For example, if you have $10,000 available credit on all accounts, keep your debt at $3,000 or below.

But your personal credit score may also be suffering due to errors on your credit report. Federal research has shown 25% of consumers have errors on their credit reports that might be affecting their credit scores. You can get your credit reports for free once per year at each of the three major credit reporting bureaus — Experian, Equifax and TransUnion — at AnnualCreditReport.com. If you find any errors, you can dispute them online through all three credit bureaus websites. This may take some time and effort, but getting errors removed should improve your score.

3. Not opening up a line of credit in advance
As a small-business owner, emergencies happen. Your roof is leaking. The plumbing is busted. A piece of equipment breaks. Thats why having access to extra funds is critical.

But waiting until the moment you need cash is not smart. What if you cant wait several days for funding? Or what if youre denied financing? Take out a revolving line of credit in advance.

A business line of credit gives you access to cash that you can borrow as needed. You can continue to borrow and repay from the credit line, as long as you dont exceed the credit limit, and you only pay interest on whats borrowed. This makes it useful for emergencies or managing cash flow.

It also makes sense for seasonal businesses that experience financial peaks and valleys throughout the year. You can draw from the line of credit during slow months and repay it in full when business picks up.

For businesses with unpaid invoices, another short-term financing option is invoice factoring, where you sell your invoices to a third party for upfront cash, minus a fee; or invoice financing, where you use your unpaid invoices as collateral to obtain a cash advance or a line of credit.

4. Mixing personal and business finances
Like oil and water, your personal and business finances do not mix. Muddling them together is one of the biggest financial mistakes you can make as a small-business owner, for a few reasons:

  • It makes it more difficult to track your profits and losses for the business, and budgeting and tracking business expenses can become a nightmare.
  • Lenders will want to know how your business is doing and may require separate income and bank statements. The lender also may not take your business as seriously if you commingle finances; they may think its just a hobby.
  • It can be harder to identify legitimate business expenses and separate them from personal expenses, which makes taking the proper business deductions at tax time difficult.
  • The IRS may audit your business if theres no clear separation between your business and personal expenses.

To avoid this mistake, never use business credit cards for personal reasons, and keep a separate business bank account for all your business transactions. You should also establish a legal entity for the business (an LLC, or an S or C corporation, for example) and obtain a federal business tax ID, if you havent done so already.

 
5. Failing to shop around for financing
A Lending Tree survey found that 58% of small-business owners did not shop around when searching for small-business loans online. Youd shop around for a mortgage or a car loan to get the best rates and terms, so why not shop around for a small-business loan? It doesnt hurt to see what your options are.

 

Besides APR, factors to consider when comparing small-business loans include:

 

  • Are there extra fees or charges added to the loan, such as prepayment penalties, application fees, and loan processing or underwriting fees?
  • Is the interest rate fixed or variable? If its variable, it can change based on an underlying benchmark index that fluctuates with the market.
  • Does the lender report payment activity to the credit bureaus? If so, that could help you establish good credit for your business.
  • Do you meet the lenders minimum requirements? Some lenders require a minimum personal credit score, annual revenue and time in business; others place more value on your cash flow.
  • Do you need collateral? Thats an asset, such as real estate or equipment pledged as security for repayment of the loan. Find out all of the requirements before applying to save yourself time and stress.

(Note: You likely want to avoid a merchant cash advance; with APRs typically in the triple digits, this is one of the most expensive forms of financing youll find and is only for those with no other options.)

 

Its also smart to search for the right type of loan based on your businesss needs. For example, if you are looking for a large loan for a real estate purchase or a business acquisition and you can wait a few months, youre likely better off comparing bank loans than looking online. If you dont qualify for a bank loan or if you need money fast (within a few weeks or less), online lenders could be right for your business.

 

Steve Nicastro is a staff writer at NerdWallet, a personal finance website. Email: Steven.N@nerdwallet.com. Twitter: @StevenNicastro.

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Netflix: Is The Street Being Too Bullish?

Netflix, Inc. (NASDAQ:NFLX) went global on Wednesday, after its CEO Reed Hastings announced a global launch of the online streaming services in 130 countries at Consumer Electrics Show (CES) 2016 in Las Vegas. The Street was extremely delighted to hear about the earlier-than-expected global launch, as Netflix stock closed 9% up yesterday.

Few Street analysts issued their bullish report on the best Samp;P 500 stock for 2015, indicating that the global launch would strengthen its global leadership. MKM Partners Rob Sanderson, Pacific Crests Andy Hargreaves, and Guggenheims Michael Morris are the latest Street analysts to give their view on the latest development. While Mr. Sanderson rates the stock as Buy with $145 price target, Mr. Hargreaves and Mr. Morris tag it as an Overweight with $140 price target, and Buy with $160 price target, respectively.

Earlier-Than-Expected Global Launch

At the event, CFO David Wells stated that the streaming giant will invest more on content this year. He expects international losses to stand at $120 million in the first quarter of 2016 (1QFY16), compared to $107 forecasted by the Street. However, the guided losses are not as much as Mr. Sanderson would have thought, given the earlier global launch.

Nothing comes smooth without hurdles. Chinese government aims at restricting the content from the streaming giant. Netflix also failed to comply with other regulatory requirements to enter the territory. Management aims to resolve issues related to its launch in China this year. MKM believes that the company could penetrate only 2% on Chinese broadband homes by 2021.

We believe there are several 10s of millions of interested subscribers in the 130 new markets/200mn broadband homes in this ROW. tranche (excluding China), Mr. Sanderson notes.

Now, he expects international subscriber additions to cross the existing estimates of 12.1 million and 13.8 million net paid additions for 2016 and 2017, respectively. Adjustments for the global launch will be made after the organization publishes its fourth-quarter financials on January 19.

Mr. Hargreaves thinks that if the content streamer executes its global expansion plans successfully, it would end this year with operational efficiency, purchasing power, and service quality. He sees a growing competitive advantage for Netflix and substantial restrictions to enter the market for its competitors.

Guggenheim maintained its strong conviction in the companys operating model and the virtuous cycle. However, it believes risk related to access the content, competition, and consumers acceptance still persists.

Expansion Pace Too High

While majority of the Street appears to be optimistic on the latest, Business Finance News sees vulnerability on such rapid expansion. At present, Netflix is available in 243 markets, compared to just 87 regions in the past. We agree that these launches were expected to catalyze the stock, but expanding on such a massive scale requires more costs, expertise, better communication with local telecoms, and awareness.

Netflix has been undoubtedly very popular in the regions it didnt operate before, though lack of strong broadband connection would be a big issue for consumers and the company. We were expecting the online content provider to gradually expand its global footprint, focusing on market where there are high broadband connections. This way it would have been easier for the giant to recover its investments.

On the positive side, the emperor gets the first mover advantage in many regions. Moreover, its service packages are really cheaper implying a consumer with decent Internet quality would opt for the service.

Lastly, the growth in its home market is decelerating, as the company is expected to add 5.6 million new users in FY15, compared to 5.9 million and 6.2 million additions in 2014 and 2013, respectively. Some analysts, including Mr. Sanderson anticipates the streaming network to miss domestic growth numbers for the second-consecutive quarter.

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More Job Cuts And Restructuring, Has Barclays Failed In Asia?

Reports suggest Barclays PLC (ADR) (NYSE:BCS) will make major cuts in its investment banking division across Asia. Among the closures is its investment banking divisions in South Korea and Taiwan. All casualties of Chinas flagging economy.

Corporate finance and advisory staff in those countries will will also be axed as part of its global restructuring plan.This is reaction to the turbulent conditions the bank faces in Asia. Most of European banks operating there are restructuring and downsizing because major Asian economies have not shown sufficient growth since the 2008 financial crisis.

There could be another pullback in India, where the British bank will shut its equities business. A spokeswoman from Barclays Hong Kong division told Reuters: We are constantly monitoring our opportunities in different geographies and businesses over the cycle. If any firm decisions are made, we will provide an update.

Such pullbacks will probably happen in Asian territories where Barclays does not have a strong market share. As competition increases, major players could push harder to strengthen their standing, leaving smaller players crushed by the inevitable squeeze.

Chief Executive, Jes Staleys vision, requires the bank to trim its operations in countries where it is weak. The focus will then move to countries where it has better chance of expanding its business. It is moving toward another round of job cuts to meet its restructuring deadlines. The CEOs three-year cost reduction plan involves removing 14% of Barclays global work force to bring the bank back to profitability.

Standard Chartered is another bank cutting the fat. It announced a year ago it would close its equity franchise in Asia. Jefferies also laid off 5% of its Asian team. Barclays Asian bankers are nervous and have begun looking for a way out.

In following the restructuring plan, the bank will allegedly scrap 7,000 from investment banking by FY16.

Barclays failed to lift its Investment Banking division in Asia, despite hiring one of the best teams for its global operations in FY09 among them Matthew Ginsburg ex of Morgan Stanley.

Today, Barclays stock opened 2.8% below yesterdays closing price. This could suggest the market is uncertain of the Banks steps to cut its costs. The downsizing has been received negatively because it signals pessimism.

The Bank of England has chosen an expansionary monetary policy by cutting the rate after increasing it. British banks will be able to increase their lending volumes, but the margin will remain low until the central bank again increases the rate. Barclays third quarter fiscal year 2015 (3QFY15) revenue declined by 10.7% year-over-year (YoY), but its earnings per share increased by 12.5% in the same quarter.

Its dividend payout ratio hugely surged in 3QFY15. It jumped from 14.64% to 40.25% in 2QFY15. Of the total assets possessed by the bank, 53.6% belonged to investment banking division.

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Why Intercreditor Agreements Will Matter More with Alternative Business Finance

Given the rise of alternative business assets to finance by non banks, one area that is important to understand is the area of intercreditor arrangements. Simply put, an intercreditor agreement exists where more than one lender has a claim again a borrower and some or all of the lenders have a claim as secured creditors. The key is secured, as opposed to unsecured.

As non bank lenders raise capital to fill the void left by banks given their reduction in leverage lending, capital constraints by Basel, and asset reductions, its important to understand intercreditor agreements. According to a survey on alternative finance conducted by Allen amp; Overy recently, bank lending is top, but by far isnt the only source of funding. Corporates are making use of a diverse funding mix. The survey found Bank lending accounts for 48% of all lending, alternative finance is 30% and the capital markets account for 22%. Furthermore, only 2% of corporates get 100% of their funding from one source.

The rise of Specialty Finance Businesses, defined as non bank companies who use a balance sheet to either buy assets or originate and put them on their balance sheet, is on the rise.

A recent article in the Secured Lender by Katherine Bell, Jennifer Hilderbrand and Jennifer Yount gave five predictions for Intercreditor Agreements in 2016:

  • Second Lien/Junior creditors will press for more favorable intercreditor terms Their reasoning is very rationale. As more non banks enter the field with lower capital costs and greater risk tolerance they will press for more privately negotiated second lien term loans.
  • There will be an increase in split collateral intercreditor arrangements and more focus on valuation methods. Their point in the article is that more parties to divide up collateral invite potential disputes on the value of that collateral
  • There will be increased sophistication around access, use and license rights related to intellectual property in split collateral deals. Point three really is a subset of the point above, andrelates to the fact that so much around finance has to do with intellectual property.
  • Intercreditor Arrangements will evolve to address cross-border considerations. I talked about this in my 11 Fearless predictions post. Essentially, as there are more innovativecross border receivable lendingsolutions developed by both bank-owned asset-based lenders and other lenders who adapt their credit policies to the fact that more and more companies have offshore receivables, intercreditor agreements must evolve to handle multiple jurisdictions.
  • In light of recent case law, senior lenders will negotiate for broader and clearer Chapter 11 protections: The authors cite court cases on how junior lenders are having more say in bankruptcy despite clear restrictions on that in their intercreditor agreements.

As any that are involved in credit underwriting know, this stuff matters a lot when problems arise. And they do arise. And with forecasts of slowing economic growth and potentially more rate rises in the US, it is important to understand the documentation and how it is interpreted in practice.

Get your company listed in the Alternative Business Finance Almanac by signing up for aFREE Almanac listingtoday.

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Bond Market Expected to be Volatile in FY16

Bond market is currently doing fine with support from mid-December rate hike from the Fed, but it is soon expected to become volatile. Many expect two hikes in FY16, but the Fed expects an environment in FY16 which would be able to support four hikes.

Treasury yields have hardly changed their track since the rate hike. The trend in the commodities market has compelled many to believe that inflation would remain low and global growth would also be slow in FY16. This is a major reason why many analysts are of the opinion that the rates would remain low in FY16.

If the Fed opts for a tight monetary policy, then the move might look gentle for some players in the market but soon they would realize that a chain of hikes is too stressful for them. The Bank of America Merrill Lynch MOVE Index, which gauges implied volatility through options prices, fell to 66.02 this week, the lowest since December 2014, Bloomberg states.

The probability of rate hike in March, April, June, and July meetings is 49.9%, 56.7%, 73.3%, and 77.4%, respectively. Dennis Lockhart, president of Federal Reserve Bank of Atlanta, has signaled that the Fed may raise rates around four times in FY16.

The benchmark 10-year Treasury note yield surged by four basis points to 2.24% at the end of last week. Deutsche Bank analysts predict that the 10-year Treasury yield would be around 2.75% by mid-next year.

Business Finance News believes that after the rates cross 1% mark, the Fed would slow down its hikes as the required tightening in the economy would have been achieved by then. That would eventually help reduce pressure on government debt, causing yields to fall back to the current levels.

Fed is not expected to raise rates by as much as in previous cycles, but the terminal rate is expected to remain low. Oil prices are expected to decline further and the dollar is expected to appreciate slightly more in FY16. What Fed wants to avoid at this time is to cut rates after it has increased them, unlike its British counterpart Bank of England.

The corporate bond yields are linked to the risk of the company that has issued them. At the moment, revenue growth is hard to find in the Samp;P 500. Expecting a recession would be a long shot, but the economic growth is to remain slow in the coming year. On December 24, 2015, the Samp;P 500 closed at 2,060.99 (a decline of 0.17%). The index has declined by 0.64% year-to-date, and maintains a 52-week range of 1,867.01 – 2,134.72.

After all this, if by any chance inflation shoots in FY16, the Fed would have perfect reason to increase the rates, contrary to what the market desires.

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Here’s Why Alibaba Group Holding Ltd Should Head North

As 2015 draws to an end, Alibaba Group Holding Ltd (NYSE:BABA) investors anxiously await the year-end stock performance. The shares made a blockbuster entry on the New York Stock Exchange (NYSE) last year. All the whistles and bells seem to have vanished with time. At present, the shareholders are enthusiastic to see when the stock will move in the upward trajectory.

Alibaba stock is headed south as the company is moving away from its core-business and venturing into various projects outside its domain. However, as the corporation is still on the verge of expanding its empire, there is an immense potential for the stock to trade upwards.

Business Finance News analyzes the recent developments at Alibaba, which are expected to regain investor sentiments going forward.

Ele.me

According to the recent updates, Alibaba will own a 27.7% stake in Ele.me, making it the largest shareholder of O2O (online-to-offline) Shanghai-based food ordering mobile application start-up. The Chinese retailer has decided to invest about $1.25 billion in Ele.me-an online platform for food delivery based in China-the worlds second largest economy.

The food delivery application has raised $350 million earlier this year from investors, which include Sequoia Capital, JD.com, Tencent Holding Ltd, and CITIC Private Equity. With Chinese consumers increasing the use of their phones, internet giants have started to invest in services through which more customers are attracted to their platform.

South China Morning Post

Recently, Alibaba has made the decision to acquire Hong Kongs leading newspaper South China Morning Post together with affiliated media assets for approximately $265.8 million. The agreement contains 100-old newspaper, outdoor advertising, magazines, and digital assets. The purchase combines the editorial excellence and culture of the newspaper with the Chinese retailer to provide news and comprehensive analysis associated with Hong Kong and China.

This move has made investors question about Alibabas ideas to pursue its long-term aims. It is believed that Alibabas founder Jack Ma has taken an unprecedented encounter as its reputation has been under pressure owing to its increasing investments outside its core-business.

On a flip side, Alibaba through South China Morning Post, will now communicate a positive picture of China. A good representation of the second largest economy will benefit Alibaba, as it has a pivotal role in the nations economy.

Stock Movement

Since January this year, Alibaba shares have fizzled to multi-year lows, owing to brutal cases against counterfeit goods. It seems that investors are worried over Alibabas management thought process of venturing into various industries rather than to focus on its core-business objectives. Investor sentiments have pushed the stock to its low levels and down over 19% in 2015.

Business Finance News believes that the stock is trading south as shareholders are confused on the trajectory that the company is headed toward. This might be the reason that at the Singles Day event, despite breaking all the record and generating $14.3 billion revenue from the mega event, the stock moved in the red territory.

Alibaba has ventured into various projects which includes telecommunication, sports, logistics, media, and other ventures. Alibaba should provide further clarification on its aggressive investment strategy. In earnings report for the third-quarter, the retailer should mention the benefits it has earned from the investments, including both financial performance and goodwill.

Going forward, more information on the investments should be made public, or else shareholders may feel threatened and will decide to divest their investments elsewhere.

On Thursday, Alibaba shares plunged in New York Stock Exchange. At market close, shares fell 1.20% to $83.78. Most of the analysts on the Street are bullish on the long-term prospects of the retailer. According to Bloomberg, out of 48 analysts who provide coverage on the the stock, 42 rated a Buy, six recommended a Hold, whereas none suggested a Sell rating. The stock has an upside potential of 14% over its last closing price, as the 12-month mean target price comes in at $95.80.

Of the sell side updates, Stifel analyst Scott Devitt rates the stock a Buy, along with the price target of $94. Furthermore, Nomura analysts Andrew Orchard also remains bullish and issues $95 price target.

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Amazon Stock Hops on Promising Holiday Season Performance

On the back of yet another successful holiday season, shares of the largest US e-commerce company bounced up during the trading hours today. As consumers are shifting from brick and mortar retailers to online selling platforms, Amazon.com, Inc. (NASDAQ:AMZN) has been one of the greatest beneficiaries.

Amazon stock hit an intra-day high of 672.40 (up 1.45% from its last closing) on Monday and was trading 0.84% higher at $668.34, as of 12:57 PM EST. Over the same time period, investors traded 1.64 million Amazon shares, compared to an average daily trading of 4.27 million. Amazon share price has grown 11.5% since it reported its earnings for the third quarter of fiscal year 2015 (3QFY15) on October 22.

Todays hike is specifically related to the online retailers performance during the holiday season. The company released a report, stating that it set record for Amazon devices, Amazon Original Series and, Amazon Price on its 21st holiday. During Decembers third week, it added over 3 million members on Prime, which offers two-hour delivery in over 20 metro areas, same-day delivery, and two-day shipping services to its customers. Additionally, the program offers TV shows and movies streaming service for no additional cost.

Amazon.com Founder and CEO Jeff Bezos said in a press release: This was another great holiday season to be a Prime member, and we welcomed three million new members in the third week of December alone.

The Man in the High Castle was the most watch TV series on Prime Videos and viewing hours of members doubled during the season, compared to the previous year. Furthermore, Amazon devices sales doubled during the period compared to 2014s record shopping season. The management said that the all-new Fire tablet was the best-selling item among Amazon devices

While other traditional retailers have suffered due to lower shop traffic and decline in spending by consumers, Amazon and other e-commerce companies have benefited during the season. Technology has become a blessing for some retailers and a curse for others. Amazon, which has beaten all of its earnings expectation this year, would report its Holiday season on January 27. Business Finance News continues to believe that it will produce another set of block buster results, which would lead to a massive jump in its stock price. In October, we predicted Amazon stock price could cross the $700 mark after its 4QFY15 results.

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UK Economy to Slow Down Despite Increase in Bank Lending

During the second and third quarter of FY15, the UK economy grew slower than expected. This fact strengthens the stance of Bank of England to keep the interest rates low, despite the rate hike from US Federal Reserve. The low growth is expected to continue in the starting quarters of FY16. Business Finance News analyzes whether the economy has any chance of showing better growth next year, despite low interest rates and increased bank lending.

Government statistics stated that UK economy was only able to expand 0.4% during the third quarter of FY15 (3QFY15), the estimate for the quarter stood at 0.5%. The expected annual growth rate was also cut to 1.8% from 1.9%.

The UK economy is still considered as the most advanced economy of FY15 with its stability compared to that of US; but its public debt amounts to 80% of its GDP. The paths for central banks of UK and US can differ for longer-than-expected duration. While US Federal Reserve is planning for more hikes in FY16 to meet the demand from its improved labor markets; we expect Bank of England to keep the interest rate low for a longer time until weakening signs from the economy are completely eradicated.

Both the US and UK economies showed almost similar signs of growth and job creations so many were expecting that Bank of England will follow the lead of Fed in rate hike. But, there are some indicators in the UK economy, which are not in the US economy and are worth mentioning here.

Britain is more reliant on household spending than the US. Emerging market exposure can be more found in UK economy compared to US economy, making it sensitive to emerging market health. Increased manufacturing and construction in UK is delaying growth, which might be expected in medium-term to show up.

Low inflation and higher wages will determine, whether UK is able to reach its expected GDP growth in FY16. The Wall Street Journal (WSJ) reported: The household savings ratio stood at 4.4% in the third quarter, the lowest figure since early 1963.

Official figures show an increase in productivity of labor, which can result in increased wages for FY16. This fact support Bank of Englands case as increase in productivity helps offset the inflationary pressure.

UK Banks

According to the British Bankers Association, net lending to non-financial companies excluding real estate went up 0.6% compared to last year in November; this marks the first surge in that particular lending type since mid FY09.

This is good news for Britain as the recent official data painted a bleak picture of UK economy with lower tax revenue and major downgrading in economic growth data. British Bankers Association Chief economist Richard Woolhouse said: Net lending to companies is now expanding, particularly in the wholesale and retail sectors, as businesses take advantage of record-low interest rates.

The low interest rate is now finally yielding some benefit for the economy, but the question is why the economic growth expectations for coming years stayed low. Business Finance News believes that growth prospects for the upcoming year are good and UK will be able to meet its 2% economic growth target. The mortgage lending is also growing with an annual growth of 28% from FY14.

Currently, unsecured borrowing accounts for a major part of the lending market. The personal loans are growing at 5.9% and credit card lending went up by 5.5%, annually. With car finance and lending from non-banks added, consumer credit grew at around 8%.

UK Stock Market

Stocks in London were steady, taking small dips to recover over time. Treasury yield there was shrinking and trading volumes are going down with holiday season going. Markets in London were opened for just half day on Christmas Eve, similar timings were observed in NYSE.

On December 24, 2015, FTSE 100 increased 0.24% and closed at 6,254.64. The index went up 2.94% since the oil started to gain momentum. FTSE 100 closed at two-week high on Wednesday. The market has reacted up to a certain degree to oversupply of oil and uncertainty of demand in China. Brent Crude went down to $35.98 on Tuesday, which was the lowest since FY04.

Investors were of the opinion that the slowness observed in commodities market is a signal of slowing global economy. But oil market went up when it was revealed that US oil stock fell 5.9 million barrels. This change in oil price trend could be linked to the fact that refineries hold fewer inventories at year end to escape taxes.

There was some capacity cuts witnessed in China which pushed the price of Base metals up. There was also an increase in buying in emerging and mining stocks which supported the sentiments in the market.

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Goldman Sachs Group Inc to Outperform as Emerging Markets Struggle

Goldman Sachs Group Inc. (NYSE:GS) together with other banks is scheduled to announce the fourth-quarter results of fiscal 2015 (4QFY15) next month. The theme for the reported quarter is Federal Reserves monetary tightening decision announced earlier this month. As banks are deemed to benefit the most from this decision, emerging markets are faced with increased sell-off and market volatility.

Business Finance News believes that the trend of 4QFY15 earnings needs to be studied, separated from the market sentiments and the interest rates story. Investors have focused on banking stocks since the central bank withdrew its long-standing stance of holding interest rates close to zero. As financial institutions are anticipated to benefit the most from the upturn, their activity on the capital market has remained stable. With the recent changes in the macroeconomic environment, financial markets have been quiet relative to the rocky patch earlier this year.

Economists and analysts feared the market volatility could keep the stocks in the red territory for long, but most financial stocks have outpaced the market in the light of strong prospects of growth both in long- and near-term.

The graph below shows the change in stock prices for Goldman Sacks, Bank of America Corp (NYSE:BAC), and Financial Select Sector SPDR ETF (XLF) over the past three-months.

The US economy has made great strides to meet Federal Open Market Committees (FOMC) goal of maximum employment with price stability. The employment reports for both October and November have been more than expected. Regardless of Inflation, being low is forecasted to upsurge, as the current decline in crude oil prices and costs for imports will not stay for longer.

Emerging Markets

As the interest rates in the US-worlds largest economy have been increased, it will lead towards deteriorating emerging markets. Investors around the globe will move their investments in the US to generate a higher return on their investments. This is mainly owing to the fact that while other central banks follow monetary easing, US is doing otherwise. Appreciation of the US dollar against other currencies has further added to the fears of under-developed economies. They will have to pay higher bills for the imported goods and receive lower remuneration on exports.

The greatest worry in relation to the Feds decision is the implication for emerging market economies and assets given excruciating memories relating to debt crises in the wake of previous US rate hikes. However, claims that emerging markets are generally better positioned for liftoff this time around in large part because they have effectively dealt with rising US rates since the 2013 taper tantrum, according to FX Street.

In the short-term, growth in emerging markets is not anticipated due the hiking cycle. Mr. Maasry still believes that Goldman Sachs better fundamentals will support returns and emerging markets growth in the second half of 2016.

In 3QFY15, Goldman Sachs generated 29.8% of its total revenue from Europe, Middle East, and Africa. Moreover, 14.3% of the revenue was earned from Asia.

In most of the cases, the emerging markets will have to fill up the space through injection of more capital into their economy or to borrow funds for smoother operations. As the increase of interest rates by the Fed is only for the short-term, emerging markets will suffer a re-pricing.

However, a bleak economic outlook, deteriorating conditions in global financial markets intensify the risk of negative spill-over to emerging markets. The rising US interest rates may create a miserable situation for emerging markets. The corporate exposure to dollar-denominated debt is expected to be affected the most.

Streets View

Goldman Sachs is expected to report earnings per share (EPS) of 4.49, translating into an increase of about 70% on a quarter-over-quarter (QoQ) basis. Revenue is forecasted to come in at $7.78 billion, representing an increase of1.22 % over the corresponding period last year. Furthermore, the bank will also reveal its figures for the full fiscal year 2015 (FY15). On a yearly basis, the bank is expected to have per share earnings of $17.68 on a revenue $34.32 billion.

This reflects the positivity in Goldman Sachs earnings. And at the same time, it is important to consider that these earnings hardly reflect the gains from the rate hike. Gains from the current monetary tightening are expected to be fully realized in the quarters to follow.

Bank of America is forecasted to report earnings per share (EPS) of $0.34, representing a growth of 5.9% YoY. Revenue is anticipated to also move in an upward trajectory. The bank is forecasted to post revenue of $20.74 billion, indicating an increase of 6% YoY.

Most of the banks are projected to see headwinds from their credit and fixed-income trading costs as both of these catalysts have a direct relation to the oil exploration and production companies. As oil prices are trading close to seven-year lows, banks are feeling the heat as they hold significant exposure to these companies in their portfolio. However, in the quarters to follow, banks are expected to get away with issues related to oil prices as they are not considered to remain high for long.

Of the sell-side updates, Atlantic Equities LLP analyst Christopher J rates the stock as Overweight, along with target price of $220. Furthermore, Keefe, Bruyette amp; Woods also remains bullish with a Market Perform rating and a $205 price target

Most of the analysts on the Street providing coverage on Goldman Sachs stock are confident on the long-term prospects of the company. According to Bloomberg, 13 analysts have suggested the stock a Buy, 16 have recommended a Hold rating, whereas only two favor a Sell rating. The 12-months average price stands at $207.17, representing a return of about 13% over the stock last quoted price.

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