Trump wins election, markets fluctuate

BY Richard Summerfield

The political outsider, Republican Donald Trump, has claimed a historic and stunning victory in the US presidential election, bringing an end to eight years of Democratic rule. The result initially plunged the global markets into chaos and stunned Wall Street.

As Mr Trump’s supporters celebrated his victory, along with Republican successes in both the Senate and House of Representatives, the dollar and US stocks endured a mixed day, falling sharply before recovering somewhat throughout Wednesday’s trading.

European shares initially followed suit. Though many news agencies predicted losses of around 4 percent, the FTSE 100 fell around 1.4 percent initially before recovering throughout Wednesday. In the first hours of trading on Thursday morning, the FTSE continued its gains, climbing a further 1.06 percent, nearing the 7000 mark.

The Mexican peso, however, dropped 13 percent against the dollar at one point, marking the currencies biggest daily move in nearly 20 years. The peso did rebound 4 percent on Wednesday, though it was still down 8.5 percent.

Asian shares rallied in trading on Thursday with the Nikkei climbing 7 percent at one point, following of 5 percent drop in the previous day’s trading. Gains were also seen elsewhere as Australian stocks soared 3.3 percent in the largest daily gain since late 2011 . Shanghai rose 1.3 percent.

Wall Street, which had lent its considerable support to Ms Clinton during the bruising and historic election campaign, was initially left reeling by the result as investors fled some of their riskier assets. Yet US stocks actually closed up on Wednesday, with investors jumping headlong into sectors which could benefit from Mr Trump's election. Oil & gas producers, energy companies and construction firm sand pipeline operators were all seen as attractive investment destinations, given Mr Trump’s preference for oil & gas investment. The fact that the GOP has indicated that it would invest at least $500m in infrastructure development over the next five years can be seen as one of the driving forces behind these gains.

Mr Trump’s views on the Dodd-Frank reform act, implemented in the wake of the financial crisis, as well as other notable Democrat legislation including the Affordable Care Act, have also affected stocks; healthcare companies fell as the markets anticipated the end of Obamacare.

Oil markets, which have steadied in recent months following two years of uncertainty, fell temporarily below $45 a barrel on Wednesday morning, as the wider global commodities market reacted to the election result with some concern. The global benchmark, Brent Crude, fell to its lowest point since August, down 2.3 percent to $44.98. However, oil prices rebounded on Thursday; at the time of writing, Brent Crude futures were up 1.14 percent, or 53 cents, at $46.89 per barrel. Though the outlook for the commodities market still appears contentious, there is hope that a recovery in the oil & gas sector in 2017 may be relatively rapid.

News: US stocks, bond yields jump after Trump shock, Mexican peso falls

M&A deal flow to be “flat” in 2017 predicts new report

BY Fraser Tennant

The recent levelling off of the global M&A market will lead to a “flat year ahead” for deal flow, according to a new survey by Dykema.

In its "M&A Forecast: 2016 M&A Outlook Survey", Dykema reveals that 47 percent of respondents stated that they expected to see “no significant change” in the global M&A market over the next 12 months - up 43 percent in comparison to last year’s survey.

The survey also found that many executives had major concerns about the effects that corporate tax increases, increased federal regulation and taxation of carried interest could have on M&A in the coming year. Conversely, M&A dealmakers opined that the disruption caused by global events such as the fallout from Brexit and the US presidential election are likely to have a “negligible” effect on deals in 2017.

Moreover, in the case of the US election, survey respondents (by a 2-to-1 margin) indicated that they felt Donald Trump would be more supportive of the US M&A market than Hillary Clinton. However, a plurality of respondents stated that both candidates would have a neutralising effect on US M&A next year.

“When it comes to M&A in 2017, the biggest determining factor is likely the fate of the US economy,” said Thomas Vaughn, co-leader of Dykema’s M&A practice. “It’s not surprising that respondents – seeing a decline in 2016 deal volume after several years of strong growth – are taking a wait-and-see approach.”

Additional findings in the survey include the continued rise in inbound M&A activity to the US due to increased investment from China. In contrast, US outbound activity in China has remained low for the second consecutive year.

“On the international front, the pace of outbound acquisitions by Chinese companies, particularly in the US and Europe, does not appear to be slowing down anytime soon,” said Jeff Gifford, co-leader of Dykema’s M&A practice. “This trend is in large part due to an increasing level of comfort navigating Chinese regulatory bodies and growing confidence that these deals will go through successfully.”

While overall the survey does suggest a subdued outlook for the global M&A market in 2017, respondents also displayed a fair degree of optimism in relation to certain segments of the market, such as the energy, healthcare and technology sectors, which they say are grabbing increasing attention from M&A practitioners.

Report: M&A Forecast 2016 M&A Outlook Survey Summary

Institutional funds hit Tesco with £100m damages claim

BY Fraser Tennant

In a move set to send further shockwaves through the financial world, more than 125 institutional funds have filed a £100m claim for damages against Tesco PLC over alleged breaches of the Financial Services & Markets Act.

The aim of the legal action is to prove that Tesco made a series of misleading statements to the stock market – comments which (it is alleged) omitted pertinent information and resulted in investors making investment decisions based on erroneous data.

“The misstatement of profits leading to a dramatic collapse in the Tesco share price caused substantial damage to many shareholders who manage money for thousands of investors,” said Jeremy Marshall, chief investment officer at Bentham Europe, the litigation funder coordinating the claim for damages. “Investors have a right to rely on statements made by companies to ensure that they correctly allocate capital.”

 In October 2014, Tesco admitted to overstating its profits by £263m. Following the announcement, the retail giant posted a 92 percent fall in interim profits.

“Tesco has misstated its accounts, and in particular its treatment of payments from suppliers, to give the appearance of static trading margins,” said Sean Upson, a partner at Stewarts Law, which is leading the case against Tesco. “The reality was that those margins were falling.  Institutional investors were therefore misled when making investment decisions in respect of Tesco. This is precisely the type of wrongdoing which the Financial Services and Markets Act was designed to redress and therefore to prevent”.

Last month, the UK’s Serious Fraud Office charged three former Tesco executives – Christopher Bush, at one time Tesco’s UK managing director; Carl Rogberg, a former UK finance director; and John Scouler, who used to be Tesco’s UK commercial director for food – over the scandal, alleging that they acted dishonestly by giving false accounts of the commercial income earned by Tesco Stores as well as its financial position.

The men are scheduled to stand trial at Southwark Crown Court in September 2017. 

Jeremy Marshall concluded: “The (damages) claim will assert that Tesco’s misstatements are in clear breach of its obligations under the Financial Services & Markets Act and investors must be compensated.”

News: Institutional funds file 100 million pounds damages claim against Tesco

Banks find path to profitability blocked

BY Richard Summerfield

Banks across the continent have struggled to achieve profitability since the onset of the financial crisis nearly a decade ago. As the crisis disappears in the rear view mirror, many analysts had hoped that financial institutions would have returned to profitability by now, but as a result of numerous head winds many are still struggling - a situation that appears likely to continue for some time, according to new report from  KPMG.

The firm’s data suggests that banks across the continent will continue to struggle to achieve profitability in the coming years due to higher capital requirements, perpetually low interest rates and the weakness of the local economy.

Marcus Evans, a partner in KPMG’s European Central Bank office, said that European banks were still grappling with low or negative interest rates and mounting capital and regulatory costs. “The successful banks will restructure their balance sheets to minimise the impact of new regulations and reduce their cost‑to‑income ratios through smart use of technology,” he said. “Reversing the profitability of European banks is not a lost cause but it will certainly be a lot of hard work.”

KPMG’s report, 'The Profitability of EU Banks: Hard Work or a Lost Cause?', suggests that Europe’s banks are set to continue to see profitability slip out of reach with the average return on equity across all banks in the EU remaining static at around 3 percent. The cost of capital, however, is considered to be around 10 to 12 percent, according to KPMG.

Regulatory pressure, which has been a notable feature of the global financial market over the last decade, may also be ramped up in the near future. The Basel IV regulations, a more rigorous set of rules, could add almost 0.5 percent to the overall cost of European banks' funding. As Basel IV looms ever closer, the pressure on Europe’s banking sector is only set to increase.

The issue of non-performing loans (NPLs)  is also a major millstone around the neck of European banks. With a total of $1.3 trillion, these NPLs are beginning to weigh heavily and will likely have a detrimental effect on lending ability for the foreseeable future.

Report: The Profitability of EU Banks: Hard Work or a Lost Cause?

Volkswagen deal rubber stamped

BY Richard Summerfield

A US district judge in San Francisco has approved one of the biggest corporate settlements on record, stemming from the Volkswagen AG diesel emissions scandal which erupted last year. The company admitted last year that it had equipped its diesel powered vehicles with devices able to circumnavigate emissions testing, which allowed them to releases levels of pollutants far in excess of permitted levels.

Under the terms of the settlement, Volkswagen will offer drivers of 475,000 of the company’s diesel-powered vehicles with 2-litre engines the option of selling back their cars to Volkswagen or waiting for a government-approved fix which will allow the vehicles to remain in service. Consumers have until September 2018 to decide whether to accept the buyback offer. If Volkswagen does not repair or fix at least 85 percent of affected cars by June 2019, the company will incur further penalties. Nearly 340,000 owners of Volkswagen vehicles, including Beetles, Passats, and Audi A3s, have registered to take part in the settlement. About 3500 owners have opted out.

Volkswagen has had to allocate up to $10bn for consumers who wish to trade in their vehicles. Furthermore, Volkswagen’s customers will also receive an additional cash payment of between $5100 and $10,000 per person by way of an apology. The settlement deal also includes a $2.7bn contribution the company must make to an environmental trust over the three year period in order to offset the pollution caused by Volkswagen’s diesel vehicles. The company will also be required to invest $2bn in zero-emission vehicles over the next 10 years.

"Final approval of the 2.0L TDI settlement is an important milestone in our journey to making things right in the United States, and we appreciate the efforts of all parties involved in this process. Volkswagen is committed to ensuring that the program is now carried out as seamlessly as possible for our affected customers and has devoted significant resources and personnel to making their experience a positive one," said Hinrich J. Woebcken, president and CEO of Volkswagen Group of America, Inc., in a statement announcing the approval.

The court’s approva did not come as a surprise. Indeed, Judge Breyer, who presided over the hearing related to the settlement, had indicated over the summer that he would approve the deal. Both parties had been urged by the judge to settle the case in a timely fashion, noting that “intensive” negotiations would provide “benefits much sooner than if litigation were to continue” and reduce the prospect of “additional environmental damage".

News: U.S. judge approves $14.7 billion deal in VW diesel scandal