Irish investors warned on ‘overvalued’ shares due to Trump and Brexit
Darren McKinley, a senior equity analyst at Merrion Capital, has told investors to cut their risks in Irish shares and global stockmarkets for the time being and delay buying until later this year because market expectations for the President Trump administration already reflect too much optimism “which sets the stage for disappointment ahead”.
World stockmarkets, including the Iseq index, have rallied since the surprise outcome of the US election as President Trump pledged to invest big in US infrastructure. The S&P 500, which includes many US technology firms, has risen 6% since November 8, while the Iseq has done better still, advancing by 8.5%.
Moreover, Mr McKinley said the Iseq rally has propelled the Irish index beyond its levels before the UK voted in June to exit the EU “despite Theresa May targeting a hard Brexit in her recent public speech, our closest competitor and largest export destination in the UK devaluing their currency by 20%”.
Other risks include president Trump carrying through on his “America first” pledges, to cut US corporation tax rates to 15% to lure back investment from overseas, which could include projects in Ireland.
Worse, he said that May would consider cutting UK corporation tax rates if she does not get her way in the UK’s divorce talks with the EU.
“Despite all of the above, Angela Merkel continues to openly discuss European tax harmonisation which would effectively see the Irish corporation tax rate increase to a level playing field with the rest of Europe,” Mr McKinley said.
Merrion, he said, is advising its clients to take profits and “wait for a better entry point when risk-return metrics improve later in the year”.
“Comparisons have been made between Donald Trump and previous US president Ronald Reagan. When Ronald Reagan took office, the markets rallied before eventually correcting significantly,” he said.
The difference this time is that markets are much more expensive now than in President Reagan’s era, he said.
“Central banks are getting more hawkish led by the Federal Reserve, implying interest costs are rising. The ‘cheap money’ ship may have set sail already,” he said.
Analysts around the world, however, are questioning the wisdom of President Trump’s pledges to reflate the US economy and predict the US central bank will respond by raising US interest rates faster than many people are anticipating.
Economists at Capital Economics in London predicted yesterday Trump’s presidency will lead to an acceleration of economic growth in the US, as well as higher inflation. However, they predict European shares will outperform.
“After all, he is proposing a major fiscal stimulus at a time when there is little spare capacity in the economy,” the economists said.
“In a nutshell, we forecast the dollar will resume its rise against other major currencies and that bond yields will climb sharply in the US but not in Europe and Japan, where we also think that equities will outperform,” Capital Economics said.
