Should investors in AIB’s shares sell now Trump slump? to avoid the
After spending at least €10k on AIB shares, investors are faced with a new dilemma
AIB is back on the market. Shares in Ireland’s biggest bank were launched on the stock exchange on Friday and promptly notched up a 5.7% gain. Private investors who didn’t sell on the day are now faced with a dilemma – should they sell or hold shares in Ireland’s biggest bank?
The same could be said for anyone with money salted away in shares – whether directly or indirectly through a pension or investment plan.
AIB was launched into a market that was already at an all-time high with some experts predicting that a long-overdue correction is coming down the tracks.
In its own right, AIB is not a compelling ‘buy’ for the average small investor.
It did make a €1.7bn profit last year as it bounced back strongly and it should benefit from our booming economy.
As Ireland’s biggest bank, it deserves to be part of a broad portfolio.
But it’s also still saddled with €9bn in dodgy loans – although this is way down on the comparative tally for 2013 of €29bn.
And with only 25% of its shares sold on Friday, the Government still controls 71% of the bank.
Although we still pay too much for our mortgages compared to other EU countries, AIB is cheaper than most in the politically sensitive mortgage market and has led the way with interest cuts.
This is good news for AIB customers who won’t be ripped off (as much) as they would be by other banks.
But it’s not so great for shareholders as it dents profitability and stops the bank making purely commercial decisions.
Where the price of AIB’s shares and that of all the others that underpin our investments go from here really depends on the fortunes of global stock markets, particularly in the US.
And looming over them all, among other issues, is a large, orange-hued figure with a strange hair-do – Donald Trump.
The stock markets were already very high when Trump was elected. Initially, he was seen as a negative. The markets don’t like uncertainty and he is as unpredictable as the weather down on his Doonbeg golf course in Clare. However, the markets can be as perverse as the electorate and, instead of falling on Trump’s shock win, shares soared instead – and kept on going up.
Conveniently overlooking his plan to wreck world trade deals, they reasoned that Trump’s
policies of tax cuts and spending loads of money on infrastructure would be good for business.
Since then, Trump’s presidency has been ineffective and mired in controversy that could even lead to his impeachment.
The ‘Trump bump’ that followed his election is long gone and Wall Street doesn’t expect much from the new president – for good or ill.
It seems that, like everyone else, the markets don’t know what to make of Trump.
Ben Bernanke is the former head of US central bank The Fed, whose cool-headed decision-making steered the US safely through during the 2008 financial crisis.
He recently described Trump as ‘a very unprecedented, unusual person’.
That doesn’t sound too bad – until you realise that Bernanke is famously understated and loathe to be drawn into political comment, let alone controversy.
To share traders who know Bernanke well, the translation they may hear is that Trump is ‘a raving lunatic’.
Markets aren’t completely immune from Trump turmoil.
Shares briefly plummeted after what was described as a ‘train-wreck’ of a first presidential press conference in January that set the tone for what we expect to be a shambolic reign.
Markets also showed signs of the jitters following Trump’s firing of FBI boss James Comey last month.
Yet, those were just temporary setbacks. A week after Comey’s sacking, shares hit all-time highs.
So why are markets ignoring the increasingly obvious flaws of the most politically powerful person on the planet?
They have had other things to think about.
After Brexit and Trump’s election, they were worried about political turmoil spreading across Europe in a spate of elections this spring and early summer.
However, the results, such as Macron’s defeat of Le Pen, have eased worries that the EU was lurching to the political right and heading for a break-up.
Company earnings have also continued to rise, bolstering the high valuations on shares.
As the chief global strategist at Morgan Stanley investment bank, Ruchir Sharma should know where shares are headed.
The author of The Rise and Fall Of Nations recently wrote in the New York Times: ‘Mr Trump’s mercurial ways may be a source of great concern or indifference, depending on your ideological leanings.
‘But Wall Street doesn’t seem to care one way or other.’
However, we’re not out of the woods yet. It takes a lot to support such sky-high share valuations.
‘Stocks in the United States have seldom risen for so long without a major setback and have never been more expensively valued, outside the tech boom of the late 1990s,’ Sharma warned.
He cited looming dangers such as rising interest rates and a huge debt bubble in China. ‘If it bursts, it could cause the next global recession,’ he wrote.
Those who bought AIB shares aren’t in recessionary mood. Their rise from €4.40 to €4.65 on Friday is a gain many times more than savers would get in a year from even the best deposit accounts.
With a minimum investment of €10,000 involved, many small investors can’t afford to have so many eggs in one basket and should think about selling and spreading their risk, if they can still make a tidy profit.
But larger investors who don’t fear a stock-market correction could get a decent income if they hold onto their shares.
Stephen Hall, analyst with stockbroker Cant or Fitzgerald, described the share as ‘an income play’ with the prospect of 4%-plus dividend yield by 2019.
After Friday’s increase, the share is close to being fully valued but ‘the investment case [for holding on] is fairly strong’, he said.
The €4.70 share price that AIB rose to at one point is bang in line what analysts believe its net assets will be worth by the end of 2017.
Yet AIB is priced much higher than Bank of Ireland and above its European peers.
Ironically, this is partly because BoI didn’t build up such huge losses that AIB can still use now to write off against tax.
The other reason is that AIB has plenty of money to pay juicy dividends.
Many would-be investors may feel peeved at missing out on Friday’s little-flagged windfall opportunity.
Only 10% of available shares were allotted to just 6,500 retail buyers, with scant promotion prior to the launch.
That’s in stark contrast to Ireland’s last major public flotation – the jamboree sale of Eircom shares in 1999 that persuaded over 500,000 people to buy dud shares that were still showing a loss 17 years later!