Sunday 8 December 2019

Richard Curran: The Trump bull run on Wall Street may well end in tears

A video board shows the Dow Jones closing above 20,000 for the first time last Wednesday,
extending a stocks rally that followed US President Donald Trump’selection. Photo: Getty
A video board shows the Dow Jones closing above 20,000 for the first time last Wednesday, extending a stocks rally that followed US President Donald Trump’selection. Photo: Getty
Richard Curran

Richard Curran

The performance of the Dow Jones seems to be the primary scorecard for the performance of a US president these days - not a good thing. As the Trump Bull Run on Wall St continued, and took the Dow Jones Index above 20,000 for the first time during the week, this "success" was seen as reflecting on Trump's early days in office.

The sharp rise in US share prices since Trump's election victory is based on two things; that he will cut Corporation Taxes and regulation in key sectors, and also that he will support a strong dollar, leading to higher interest rates which will be good for bank stocks.

That is why a sizeable chunk of the stock market gain is down to massive share price gains by bank stocks. Goldman Sachs shares are up 34pc since Trump's electoral victory in November, which has boosted the company's market capitalisation by $24bn to $96bn. JP Morgan shares are up 26pc and its market value has risen by an incredible $64bn since the election to $314bn.

But what do his policies mean for the real economy? A rising dollar will hit exports and real jobs. Building more cars in America, instead of Mexico, will drive up the cost of cars to consumers.

There are an estimated 14 million US jobs linked to the North American Free Trade Agreement between the US, Canada and Mexico.

President Trump wants to re-negotiate it. Such a move would hit Mexico very hard. US corporations have invested over $100bn in Foreign Direct Investment in Mexico, most of it since the Nafta agreement was signed.

Around 80pc of what those American companies export from Mexico goes to the US. What might a Mexican economy in freefall do for the profits of those US companies whose stocks trade on Wall Street?

The speed of the Dow Jones surge has been truly extraordinary and even worrying. It took the index 483 trading sessions to go from 18,000 to 19,000. Yet it has taken only 42 sessions for it to go from 19,000 to 20,000. This has pushed up average share valuations from 15.5 times expected earnings on election day to their current levels of around 17.3 times.

For now, the market is confident that Trump will enact the policies that will underpin those valuations in real profit performance.

They may even be right in the short term but it wouldn't take much to blow the froth off this stock market surge.

As long as it does last, some of the investor frenzy will make its way abroad. This could be good for the financial sector in particular and clearly Michael Noonan sees it as an appropriate window of opportunity to get the AIB public offering away at a reasonable valuation. He has said he is gearing up for a May or June flotation.

If he succeeds, Irish taxpayers may get at least one good boost helped on by the Trump effect.


Barclays dipping toe in Liffey may bring boost

IT SEEMS there may be some glimmer of positive news on the Brexit horizon too as Barclays is reported to have chosen Dublin for its main hub inside the European Union after Brexit. That is good news and they are very welcome. But before we get carried away at becoming Canary Wharf on the Liffey, we are only talking about 150 staff and it will only happen if UK-based finance companies lose easy access to the European single market, Bloomberg reported.

Barclays is dipping its toe in the Liffey waters rather than taking a big plunge. However, it does have several positive consequences. Credit Suisse, Standard Chartered and a range of others are all reported to be considering Dublin as an option for EU operations.

They will take some comfort from seeing a name like Barclays opt for Dublin, if in fact it actually does.

As we saw in the tech sector, having one or two big players choose Ireland encouraged many others to take the option seriously and eventually follow the leaders.

However, shifting 150 jobs to Dublin looks like sensible contingency planning by Barclays and something that could either be built on in the future, or reversed depending on how things play out. It's called hedging and companies like Barclays are usually pretty good at it.


O'Leary sticking to his guns on Brexit fallout

Speaking of hedging, Ryanair appeared to some in the British press to be doing just that with Brexit. After predicting cataclysm from a Brexit vote last year, Ryanair announced nine new routes from Stansted in recent weeks.

This prompted some media across the Irish Sea to suggest the airline might have changed its mind.

But there was no such flapping from Ryanair. Michael O'Leary firmly nailed his colours to the mast in media interviews during the week.

Ryanair is still planning for major disruption in its business as a result of Brexit including the outside possibility it may have to move its entire UK fleet to continental Europe.

The airline flies one-third of its 120 million passengers from UK airports, leaving it among the most exposed in the industry to Britain's decision to leave the European Union.

O'Leary believes there will also be a negative impact on Irish passenger numbers arising from Brexit too.

He also questioned how the UK would fare in relation to the Open Skies policy that has applied across the EU and has been an integral part of Ryanair's successful business model.

O'Leary says he is focusing on contingency planning rather than lobbying because "most of the industry is in denial... and the UK are just talking to themselves".

He clearly hasn't changed his mind about Brexit at all.


Paddy Power a safe bet as punters recycle winnings

AS country crooner Kenny Rogers said of gambling, "you've got to know when the hold them, know when to fold them, know when to walk away and know when to run". It seems to be a life lesson not yet learned by many modern online punters.

Paddy Power Betfair issued a fairly strong trading update with an 18pc increase in group revenues.

But it pointed to "customer friendly" results in the fourth quarter hitting it for £40m. This included a £5m hit on Donald Trump's election.

But just how big are these hits to Paddy Power's bottom line? The group pointed out that the £40m was "before the benefit from re-cycling of winnings." A sizeable percentage of regular customers take their winnings and place them on something else.

Headlines about Trump's victory costing Paddy Power £5m play well with punters, journalists and Paddy Power itself. The real net loss is probably less.

The betting giant noted that online revenue in the fourth quarter fell 3pc through a combination of adverse sports results and "weakness in gaming".

The popularity in gaming is unlikely to have waned so this may reflect a slight impact from increased competition in this more crowded market.

Now, that would be more likely to trouble chief executive Breon Corcoran than paying out £5m on a Trump win.

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