Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 20/04/11

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Blogging has been light the past few days because I’ve had to finish off some articles for Business & Finance magazine. That said, it probably would have been reasonably light anyway because we haven’t had a whole lot new going on in the markets since I last scribbled down my thoughts.

On Ireland Inc, Moody’s followed up last week’s 2 notch downgrade of Ireland by downgrading AIB, Bank of Ireland, EBS & IL&P by 2 notches and ICS by 1 notch. All of Ireland’s banks are now listed as “junk”, and to me this shows just why a longer-term financing facility has to be put in place by the ECB – with that sort of a rating, and the economy not about to “turn the corner” any time soon, you cannot realistically expect them to be able to go out and source funding at affordable rates once the EU-IMF “arrangement” (anyone who calls it a “bail-out” needs their head examined) expires in 2013.

Staying with Ireland, privatisation was always going to be one of the measures used by government to address the country’s battered balance sheet, and the McCarthy report has advocated the disposal of some assets. Taoiseach Enda Kenny has spoken of raising €2bn from asset disposals, which would only cover the deficit for the first two months of this year.

On the deficit, I was interested to hear that the President of Uganda has bought himself a new Gulfstream private jet. And that would be of no interest whatsoever to me, if the geniuses in the previous government here hadn’t given him €33m in direct aid last year.

The UK housing market has been defying gravity for some time, so I wasn’t overly surprised to see that London property asking prices have increase to record levels. It is amazing that this is happening given that (i) rates are going to go up this year; (ii) austerity measures are only going to intensify; and leading on from that (iii) 500,000 public sector workers are scheduled to lose their jobs. So, in my view, this UK housing recovery from the lows seen during the recession is only going to end in tears.

(Disclaimer: I’m a shareholder in Playtech) Those of you who like to gamble will be interested in the FBI and Department of Justice raids on US poker sites last week. Davy’s David Jennings – who along with Gavin Kelleher in Goodbody is one of the two best analysts covering the sector in this part of the world – has a great summary of what the implications of these raids on Europe’s listed players are here.

Staying with the US, S&P downgraded its outlook from stable to negative for the first time ever. This is no surprise, given what I’ve written in the past about the US’ unsustainable deficit. Other sovereign concerns saw gold break $1,500 an ounce for the first time, while Greek 2 year yields hit 20% and Portuguese 2 year yields hit 10%. The only solution to all of this is – as we have here – severe fiscal consolidation, which will put further strain on consumer-orientated stocks. And God help Northern Ireland if the UK expects it to pay its own way – government spending accounts for a whopping 78% of Northern Ireland’s GDP.

And what shape should this fiscal consolidation take? It should mainly take the form of spending cuts in my view. Because tax increases – particularly on businesses – would lead to more of this sort of thing. Bear in mind that most of our large indigenous companies – CRH, Ryanair, Kerry, DCC and so on – only generate a small % of their earnings in Ireland. So hands off our 12.5% corporation tax rate! I should add that I’m a shareholder in Ryanair and CRH and clearly have a vested interest, but the point is a valid one nonetheless.

What would a blogpost from me be without more bashing of the BRICs?

(Disclaimer: I’m a shareholder in Chaucer). I was interested today to see that one of the Lloyd’s insurers, Chaucer, has received a takeover bid, which it has accepted. It’s a little less than what I was hoping for – at a total of 56p it’s about 10% below its recent highs, but given the recent catastrophes that have befallen Japan, New Zealand and Australia  some valuation attrition was inevitable. Its biggest shareholder has come out against the deal, so this story may have a few other twists to it. But I’m getting close to 8% dividend yield on it (in constant FX terms) so I’m happy to wait and see what happens. If it all collapses I’ll still have a stock paying me a very handsome dividend, and if not and the deal goes through I’ll have some more cash to play the markets with later on in the year. Not the worst dilemma to have!


Written by Philip O'Sullivan

April 20, 2011 at 4:06 pm

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