Investors shrug off $8.9bn fine

Tue, Jul 8, 2014, 01:15

The $8.9 billion fine imposed on French bank BNP Paribas for violating sanctions against Sudan and other countries was unprecedented, but investors were nonplussed, shares rising 4 per cent.

Yes, shares had fallen 16 per cent in preceding months, but the fine is less penal than it appears. Shareholders can expect the same dividend as last year, while BNP’s core tier-one capital ratio is largely unchanged.

BNP concealed more than $190 billion in transactions over a 10-year period.

It did so even though its own compliance department had warned about working with the Sudanese government, which “has hosted Osama Bin Laden and refuses the United Nations intervention in Darfur”.

And yet the fine is very manageable and no one is being prosecuted.

Clients might pull their business, of course, hurting the bank. However, given BNP trades on a higher earnings multiple than many European peers, investors obviously think that’s unlikely.

Is bull market too reliant on buybacks?

Hedge funds, international investors, company insiders and investment institutions are all selling US stocks. So why are indices hitting all-time highs?

Ordinary investors are buying, but the main source of purchasing power is companies buying back their own shares, says an LPL Financial report. Buybacks support share prices and artificially boost earnings per share (EPS) figures – it is estimated buybacks were responsible for half of the increase in first-quarter EPS.

However, they make more sense if shares are undervalued; critics see it as wasteful if companies are buying overvalued shares in a five-year-old bull market.

Research outfit TrimTabs suggests companies are becoming wary, with money spent on buybacks in the second quarter ($92.7 billion) the lowest number in seven quarters. In June, the number of buyback announcement plans hit its lowest level in three years.

With buybacks appearing to have been the main driver of share price gains, there is an obvious danger this ageing bull market will run out of steam if executives finally decide to rein in their spending.

Russia tempts bargain hunters

The trading opportunity in Russia has passed, with the Micex reclaiming all its Ukraine-induced losses following a 20 per cent three-month gain. To long-term contrarian investors, however, Russia remains an obvious bargain.

The Russian opportunity “is amongst the best I’ve encountered in the roughly one-third century that I’ve been fortunate enough to be in this business”, fund manager David Iben enthuses in his latest client letter.

Yes, investors face organised crime, corruption and powerful billionaire oligarchs, he admits, but the Russian market trades on five times earnings and 0.6 times book value.

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