Stocktake: Investors await AIB’s market return

Seven years after its nationalisation, AIB returns to the markets this month. Ordinary Irish investors have bad memories after being wiped out during the crash, but international institutions will be eyeing AIB's initial public offering (IPO) keenly.

The pitch – dividends; lessons learned and a new conservative management team; a recovering loan book; most of all, access to Europe’s fastest-growing economy and a strong property market recovery.

Mortgage lending in Ireland totalled €5.7 billion last year, compared to pre-crash levels of €39.9 billion, and has room to rise substantially. AIB is more of a pure play on Ireland than Bank of Ireland as 40 per cent of the latter's loans are in the UK compared to 14 per cent for AIB.

Nevertheless, AIB remains hobbled by the mistakes of yesteryear. Bad loans have been slashed from 34 per cent of its loan book to 14 per cent, or €8.6 billion, and AIB is promising to cut that by a further €6 billion to €7 billion over the next three years. If you account for restructured loans, however, AIB’s bad loans figure rises to 21 per cent.

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In any event, some investors remain blissfully ignorant of the fundamentals. Michael Noonan, brokers and financial columnists have warned on multiple occasions that AIB's tiny float means its current share price is overvalued and not to be trusted, but shares have nevertheless have moved sharply in recent weeks. An imminent return to rational pricing means the so-called "eejit trade" is about to end painfully.

Stocks poised for further gains

Stocks continue to hit all-time highs and volatility remains absent, a combination that augurs well for the remainder of 2017.

The S&P 500 has already hit 20 all-time highs this year, while markets remain extremely sleepy. Market historian Sam Stovall found 17 previous years where stocks were both unusually strong and unusually quiet. On average, annual gains averaged 19.4 per cent; stocks rose in all 17 years.

LPL Research strategist Ryan Detrick’s data is similarly bullish. Stocks rose 8 per cent over the first 100 trading days of 2017, notes Detrick, who found 23 previous years where equities enjoyed a similarly strong start. The S&P 500 gained on all 23 occasions. More importantly, stocks continued to move higher as the year progressed on 20 out of 23 occasions, gaining an average of 9 per cent.

The moral: expect the dip-buying mentality to persist and the bulls to remain in control.

Bitcoin heading for $100,000?

A bitcoin bubble? Not at all, says Saxo Bank’s Kay Van-Petersen – the cryptocurrency is heading for $100,000.

Last December, when bitcoin was trading at around $750, Van-Petersen correctly predicted bitcoin could top $2,000 in 2017. That lucky guess means some have anointed him as the next Nostradamus, and last week he told CNBC a $100,000 price is possible within 10 years. Van-Petersen, who owns bitcoin, said his estimates might even be “conservative”.

What about the volatility? Aren't bitcoin's wild swings a bit too crazy for most folk? Apparently not. "A lot of people talk about the volatility, but if you are in Zimbabwe or Venezuela this volatility is nothing", said Van-Petersen. "I think in the West a lot of people view it is as speculative, but emerging markets will get it: their needs will be different."

If your reference point for what constitutes volatility is a couple of hyper-inflationary basket cases, then, yes, bitcoin’s volatility is “nothing”. For most folk – in both developed and emerging markets – bitcoin remains too hot to handle.

No stock splits for Amazon and Google

$1,000 is the new $100. Amazon shares briefly touched $1,000 last week, becoming the second S&P500 company to trade at such lofty levels. It won't be the last – Google parent Alphabet is within touching distance of $1,000, and US companies are increasingly abandoning the idea they should split their stocks to prevent share prices from being "too high".

Stock splits are a cosmetic exercise. Amazon could do a 10:1 stock split that would see its shares trade for $100, but its market capitalisation would be unchanged. Though cosmetic, for decades companies felt obligated to split their stock when prices hit elevated levels. In 1997, 93 S&P 500 companies split their stock. Last year, six did so. This year has seen only two stock splits.

Splits increase trading costs for institutions. Studies bear out Warren Buffett’s contention that splits increase speculative activity, leading to increased trading and volatility. By avoiding splits, companies signal a preference for rational, long-term investors.

Splits are defensible if done very occasionally, so small investors are not denied entry. However, does it make sense to say that $200, $300 or $500 share prices are “too high”? Not really, and it seems companies are belatedly recognising they don’t need to bow to the quasi-mystical notion that “high prices bad, low prices good”.