Market Wrap 28th November

What could Italy leaving the Eurozone mean for Europe following Brexit? (by Sam Schlagman) Although some might think that levels of uncertainty within the financial markets are at an all time high, a ‘no’ result in Italy’s referendum next week will only cause greater problems for investors. The referendum is providing Italian voters with the opportunity to decide whether or not they are supporting Prime Minister Matteo Renzi’s constitutional reforms. Renzi’s plans include a reduction in the power of the Senate, which would no longer be able to vote on legislation. The aim of Renzi’s measures is to create a more efficient decision-making system, where passing and amending laws in Italy will become significantly easier for the government. Italian voters are aware of Renzi’s warning that he will not continue his role as Prime Minister if he is defeated by a ‘no’ vote. Voters are therefore deciding between constitutional reform or a new prime minister. A ‘no’ vote on December 4th is beneficial to Italy’s Five Star Movement - a political party that seeks to leave the European Union. This will certainly increase financial risk for investors. Not only will a ‘no’ vote lead to national elections, but it is also likely that it will result in a subsequent referendum that will see the Italian electorate deciding whether or not they want to remain using the Euro as their national currency. The possibility of Italy leaving the monetary union poses different threats to that of the UK leaving the EU. For example, how would Italy pay back its national debt? Is the uncertainty that followed the Brexit result and the Trump election going to continue next week when Italian voters take to the polls?

Not ‘Made In China’ (by Valeria Pavero)Founded in 2003 by three Manchester University graduates, the Scottish company Skyscanner has 60 million users a month with a revenue of £100 million. On Thursday, the firm was bought by the largest Chinese online travel company Ctrip.com International Ltd, for £1.4 billion. According to Jane Sun, CEO of Ctrip.com, this acquisition is the first major step overseas towards a global market. The merger was mainly technology-driven. Skyscanner has leading technology on the front end, for what concerns search and price comparisons, whereas Ctrip is rather stronger in technology on the back end, to carry out consumers’ orders. Ctrip, which now leads the market in China with more than 40% of market shares for tickets, will definitely benefit from Skyscanner’s renown international brand recognition, given that their company is largely unknown outside of China. Their aim is to expand globally and to improve support for customers travelling abroad. However, this sale raised some concerns in Britain. Takeovers of leading British companies by foreign firms are taking place and becoming much more popular, e.g. Cadbury sold to Kraft in 2010 and House of Fraser sold to Chinese investors. The pace of takeovers of Western companies by the Chinese is a major challenge that Europe and the USA will have to face and regulate in the next years to defend their strategic interests. The Skyscanner team reassured employees that no major changes would happen, beside gaining access to Ctrip’s stronger technology, and the current management team will still be in charge as chief executive Gareth Williams states that none of the 500 UK-based employees would lose their jobs.

Will the end of dirty money mean clean future for Indian politics? (by Shay Sharma)Following the recent manoeuvre by Narendra Modi, the Indian Prime Minister, to make the currency that forms 86% of circulation as no longer legal tender, anticipated inconvenience has arisen. The main motivation was to tackle the ‘black’ economy that accounts for 20% of GDP, meaning cash transactions that ultimately are not declared for government taxation. However, economic as well as societal disruption has arisen as the obsolete currency must be traded for anti-counterfeit notes as well as cash-operating businesses experiencing a systemic shock and thus economic activity. While the policy seems to have positive intentions towards cleaner economic activity, will the evidently corrupt political system be changed for the better? Currently there are expenditure limits of $102,000 and $41,000 for parliamentary and state elections respectively; the late Gopinath Munde, former BJP MP, admitted that in 2009 he spent $1.2 million on his 2009 re-election! Munde’s case was no outlier either, as 2014 Andhra Pradesh state elections saw local candidates spending between $1.5-2 million, and cases of the legal limit being joked to be spent on the election day itself by a 2009 MP. You may be wondering how these campaigns are financed and the issue is, three quarters of the six national parties’ incomes are from ‘undisclosed sources’. The major loopholes within the political system will need to be fixed should Modi care for a fairer and cleaner India in the long run, or whether this new policy is an attempt to choke smaller competitors relying on cash-rich enterprises and to win the state polls of Punjab and Uttar Pradesh in the following months. Nonetheless, this move is a sign of risk-taking that India desperately needs to compete as a global superpower and future MEDC, should Modi utilise this momentum and really cleanse the political system.

Market Wrap 14th November

Donald Triumphant (by Shay Sharma) As you undoubtedly already know, Republican Donald Trump is now the president-elect of the United States of America after gaining 270 out of 538 electoral votes and carrying 29 states, the majority over former Secretary of State Hillary Clinton of the Democratic party. But what could this mean for global politics and business going forward? Trump, with a net worth of $3.7 billion (Forbes 2016) is a true businessman and aims to bring his entrepreneurial spirit to an increasingly uncompetitive America, hoping to make it “Great Again” and rival Asian emerging economies. Initially he has stated that expansionary policy by government spending shall be implemented to generate work for a structurally unemployed working class, in addition to building infrastructure in order to increase the productive potential and efficiency within industries. What this means for the UK, despite Obama’s claims, trade deals will be welcomed following the Brexit decision earlier this year, as Trump is keen to keep a close relationship economically. On the contrary to his obnoxious and perceivably aggressive campaign, he indicates interest towards improving relationships with Russia and is against NATO, a positive sign towards world peace as healthy international relations seem a priority. However, within America social divide and unrest is a threat considering how closely split the population voted (Hilary was more popular by approximately 600’000), which could lead to greater instability going forward as protests and hate groups emerge.

Trump is Making American Companies Great Again (by Sam Schlagman)The week of the election sees minimal M&A activity. Is this going to continue under Trump’s presidency? Earlier this year, it was believed that a Donald Trump presidency would only have a negative impact for Mergers & Acquisitions. His distaste for large corporations having a significant concentration of power was clear: his campaign suggested that he was adamant to prevent AT&T’s acquisition of Time Warner and to break up the 2013 merger of Comcast and NBCUniversal. But does this mean that Trump will not follow the style of previous Republican administrations that have been more lenient about mergers in the past? Although it is difficult to determine the path that M&A activity will take under the new president, analysts are predicting that Mr. Trump will support transactions that enable US companies to improve their international competitiveness, as well as transactions that protect domestic manufacturing jobs. This would be good news for the pending $130bn Dow Chemical-DuPont merger, which would see the two largest US chemical companies join forces. At the same time however, it is predicted that the new president will not support foreign-led takeovers of US companies. This will put a number of deals in jeopardy, including German chemical company Bayer’s takeover of U.S. seeds giant Monsanto. The difficulty of Chinese companies to buy US assets under Obama will only become tougher under Trump. With a number of megadeals being blocked by the DoJ in the past, including Comcast’s acquisition of Time Warner Cable and Sprint’s takeover of T-Mobile, it will be interesting to follow the extent to which this will continue under Donald Trump.

The US Election on Financial Markets (by Valeria Pavero)Financial markets were deeply affected by the big turnover of predictions which characterized the elections on Tuesday. The unpredictability of Trump’s personage means higher risks for markets projections as well. On election night markets looked pretty gloomy: Mexican peso was down by 12.9%, Dow futures were down by 4.13%, and US Treasuries yields surged to highest level in months, with the 30-year yield reaching 2.80%. Asian stocks were hit even harder, with Shanghai Composite down by 1%. Australia’s SX 200 went down by 2.1%, Hong Kong’s Hang Seng by 3% and Japan’s Nikkei 225 decreased by 6%. After several unforeseen shocks, such as recently the British referendum results (Brexit), however, markets seem to have learned a lesson and the initial panic was quickly under control. In fact, short after the first downturn, stock prices began to rise again and markets started to slowly recover. Nikkei, for example, recovered by 6.72%, Hang Seng added 1.89% and Australia’s ASX also managed to finish with a gain of 3,34%. Financial and market analysts strongly believe that some industries could in fact take advantage of the Trump’s new course: the pharmaceutical, energy and banking sectors might benefit from a lower regulatory pressure or even future deregulation and a consequent reduction of operation and compliance costs. In particular, banks could take a deep breath after a prolonged low-interest-rate environment which reduced net interest margins. Major companies in the defence industry will also increase their budget thanks the stronger US military policy envisaged by the new president. Finally, tax cuts could positively affect all businesses, although they could also increase sovereign debt and foster income inequality, favouring high-income earners. Are investors’ expectations underestimating political pitfalls?

Market Wrap 7th November

Impact of US Election on Mexican Peso (by Jolee Tung) Hold onto your hats everyone, it is one day until the long awaited 45th US Presidential Election. Whether you are hedging your bets on the Elephant or the Donkey, don’t forget to keep your eye on how investors are interpreting the whole debacle. For the most part, the market is anticipating a Clinton victory because nothing has fallen that far yet. Project 538, a source reliable among investors, has given Mrs. Clinton a 65.8% chance of winning. However, the ups and downs characteristic of the race to the White House have sent the Mexican Peso into a state of volatility. Trump has long been advocating for his anti-Mexican rhetoric, with threats to scrap NAFTA and block remittances from migrants. As Valeria Moy, director of think tank México Cómo Vamos, argues, “we live on trade” and Trump’s anti-free trade policy has induced anxiety among international investors. The strength of the Mexican Peso has closely mirrored polling results in favour of Clinton as currency experts predict that the peso could tumble anywhere from 21 to 29 to a dollar if a Trump victory materializes. Similar jitters are beginning to emerge among other developing markets like the Brazilian real. So friends, while you may be preparing your drinking games for Tuesday, November 8th, remember that it won’t be all fun and games if the “impossible” actually happens.

Record month for global deals, with GE and Baker Hughes set to become second-largest player in oilfield services industry (by Kamran Malik)October has been the 7th busiest month for M&A activity in history, with combined global deal values of $502.8 billion, bringing global deals to $3,042.8bn this year. This has made up for a weak first half, and comes despite the uncertainty surrounding Brexit and the US election. There could be upward pressure on corporate bond yields, as firms issue more debt in order to finance acquisitions, increasing demand for capital. For General Electric (GE), they have made an offer to combine its oilfield services business with that of Baker Hughes, creating one of the largest producers in the industry. Both parties will agree to contribute their operating assets to a partnership structure, controlled by GE with a 62.5% stake. Combined annual revenues are estimated to be $32bn. The new entity will benefit from technological synergies, including access to General Electric’s ‘Predix’ big data software, and will be laterally integrated, offering a wider mix of products and services. The deal is still subject to approval by both regulators and Baker Hughes shareholders. Halliburton Co previously attempted an acquisition of Baker Hughes, but this was scrapped due to opposition from antitrust regulators. A one-time dividend, funded by General Electric, of $17.50 per share is to be paid to Baker Hughes shareholders. GE could issue up to $20bn corporate debt to finance future growth.

Spring in the step of China's economy in October (by Ján Hajduk)Chinese stocks are starting the month on the front foot better than expected, experiencing an economic boom after hitting 2-year high in October. The official purchasing managers' index (PMI) came in at 51.2, which is 0.8 higher than the previous month, led by manufacturing and service sectors, beating predictions in 2014. The aim is simple: stay as much above “the 50 line” as possible. The 50 line is the line dividing the economic activity. All the figures above indicate the expanding activity, whereas the below figures mean contraction. "The better-than-expected PMI readings, the strongest in over two years, are a welcome sign that the recent cyclical recovery continued to gain momentum going into the fourth quarter," said Julian Evans-Pritchard, economist with Capital Economics. It is a solid sign that China is on the best way to regain the position it has lost in the previous months.However, analysts have already provided us with finger-wagging information that China's economy may fall again. With the debt levels 250% of GDP, there is no doubt that the numbers are concerning. In spite of the fact that local markets gave the positive response to the October's PMI data, only time will show whether it has a long-term effect.