Despite the market turmoil of last year equities still offer good long-term value

Last November I wrote an article in the Sunday Tribune about bank shares, saying I believed they were the kind of opportunity you might not see again for a generation.

Apologies to anybody who bought shares based on my opinions at that time. The adage 'things never get so bad that you can't still lose 90% of your money' holds true and the lows of early March were a testament to that. As of last week people who bought Bank of Ireland when they were trading at 85c-€1 have gained 100% or more on those shares at several points in the interim.

However, despite such impressive returns, it is important to realise that volatility is not gone. Indeed, in the few days that have passed since writing this article the price has moved from €2.30 to €1.55.

For that reason, if you made 100% or more in recent months, it is time to consider selling about 40%-50% of your holding – this is specific to Bank of Ireland bought at below €1 – essentially taking back out your initial investment. If there are more gains you'll miss out on some profit, but if there are future shocks, if banks are nationalised, or we enter a W-shaped recession you'll be glad you did so.

Banks are still central to a market economy, and irrespective of what the recent popular turn to the left brings us, we will not live in a world without financial institutions. Long term, I believe banks will return to profitability having learned some very painful lessons, lessons that will strengthen their future business model as they return to traditionally profitable 'vanilla banking' as it is often called.

Having said that, we still need to get through the current mess and uncertainty will remain in the financial markets, so the roller-coaster is not over yet. Banks also must change some of their practices.

One of the issues that must be addressed is margins; lending margins (on home loans in particular) are still far too low and that's before looking at the back book. As a broker I rejoice in this, but as an ob­server I believe it is an error.

This will change. You'll see it in variables when the margin increases at a time when the base rate doesn't. Now is actually a good time for banks to start because, with rates so low, small increases would make very little difference in both monetary and perception terms.

Fixed rates are starting to price in higher margins. We are seeing this on the three-year and five-year money. This is part of my argument for fixing now rather than later if you are on a variable rate loan.

As for bank shares, I have decided to take some profit from the banking positions and put it into oil and water, the two ingredients the world needs to keep itself going. I don't know if 'peak water' is possible, but with a world population of six billion and rising, potable water will become a bigger issue. We might even see a war over water in our lifetime.

Despite the market turmoil and savage losses that many investors saw in 2008 I remain a believer in equities. Even a super-bear like Stephen Leuthold has said he "never saw better long-term value in equities" and he has been an analyst for nearly 50 years, as well returning 70% in 2008 by taking short positions as a rule.

I'll check back in later in 2009. For now I need to keep a firm grip on the edge of my seat.

Karl Deeter is operations manager of Irish Mortgage Brokers