Richard Curran: 'Brexit anoraks say one thing, but the market says something else'
The political anoraks say one thing. Investors say another. That is how things are shaping up after a tumultuous week in British politics as Theresa May’s Brexit plan was shot down in flames.
Arch Brexiteer Jacob Rees Mogg hosted a champagne party as his Grade II listed home following the bruising defeat of the May plan. Boris Johnston, David Davis and around 25 others were there celebrating the demise of the plan. They obviously felt it was good news for a hard Brexit.
Meanwhile, on the financial markets, investors are changing their minds about sterling and are now backing it to rise, on the basis that despite the current turmoil, the UK is heading for a softer Brexit. One side or the other has got it wrong – surely. Britain’s biggest bank, HSBC, said it had “changed its view on sterling” after the vote. “We have become more upbeat, said David Bloom, global head of FX research at HSBC.
The pound has been climbing in value for the last five weeks. And the decision by the bank to back it rising follows pronouncements last week by two prominent multi-millionaire Leave supporters, who now believe the currency is set to rise in value on the back of a softer Brexit or no Brexit at all.
Peter Hargreaves and Crispin Odey appeared to suggest they were now of the view that Brexit won’t happen. However, Odey later clarified his remarks saying he had been misquoted and his reference to no Brexit was a short-term view rather than something for the longer term.
The pound is at least 14pc below the level reached prior to the vote to leave the EU. Some estimates have suggested that if a soft Brexit or no Brexit emerges, the British currency could rise in value by up to 20pc.
Sterling rose to a two-month high against the dollar on Thursday as more market analysts believe the risks of a hard no-deal Brexit have receded despite the headlines reporting how May’s relatively mild Brexit plan had become a dead duck.
Currency analysts are mapping out various risks and ascribing percentages to them. They then come up with a blended risk profile and some have decided that it was up to now too skewed towards the negative.
Any suggestion of a rise in sterling’s value against the euro will come as good news to Irish exporters. They have been grappling with the challenges of a more expensive euro which has undermined the competitiveness of Irish exports to the UK. This of course includes the Irish tourism sector where British visitor numbers have been hit by a weaker sterling.
The optimists among us might envisage a situation where Brexit doesn’t happen, sterling goes up in value and Irish exporters benefit on the double.
Unfortunately, even if that very benign scenario were to happen, there are lots of obstacles to be overcome first and at the very least many uncertain days ahead for some time to come.
Sterling could be highly volatile during a second referendum campaign, especially if opinion polls suggested it was going to be a close-run thing. So there is some scope for hope, but it is too early to go jumping into having a punt on sterling or having a champagne party either.
Datalex’s share price nosedive
What a total mess travel software group Datalex has got itself into. Its surprise profit warning during the week was a humdinger. Brokers were expecting a $16.2m profit – Datalex is talking about a loss of $1m to $4m.
The reasons behind it are about as clear as mud. The company said it may have misstated its previously reported numbers.
It appears that the company booked as revenue amounts that presumed the full recovery of certain costs in time before the end of that reporting period.
However it now says it has failed to recover costs that had been incurred in delivering its services revenue. On the one hand, management are saying that it will recover these costs, but just not in time for year-end. On the other hand, it is saying “most of this revenue, not recognised in 2018, will be recognised in 2019 and 2020.”
So it hopes to get most of it, but not all of it. Money we said was in the bag, wasn’t in the bag but it will be in the bag – well most of it will. Negotiations regarding the recovery of a revenue shortfall were ongoing, the company said. It doesn’t inspire a lot of confidence. And the share price was duly punished for it as investors flogged shares on the day the bad news was announced. Datalex shares shed around 59pc, plummeting from €2.44 to €1 and then as low as 95c in the immediate aftermath. The turnover of shares in Dublin that day was around €8.8m. In the following days, the stock climbed back to around €1.35 as the market digested the news and the fact that Datalex had hired independent accountants PwC to look into what happened. However, the climb from a low of 95c to €1.35 last Thursday, (a gain of 42pc in two days) was on very thin volumes with turnover reaching just €500,000.
Investors who piled in on Tuesday at 95c are sitting on a 42pc gain on Thursday.
Questions still remain about what happened. What set of assumptions were made by management about how it recognises revenue in its accounts? What assumptions were made about recovery of these costs within the trading period, which ended up so wide of the mark? Were the assumptions around booking revenue and cost recovery any different to before and if not, then how come they got it so wrong this time round?
If Datalex discloses PwC’s findings, learns from the mistakes and then actually does recover most of this revenue, it may well bounce back. The market will not forgive further mistakes.
Room to improve at the National Children’s Hospital
The rising cost of the National Children’s Hospital is undoubtedly a shambles. We will probably end up with a fantastic state-of-the-art hospital but we will have absolutely no idea whether it constitutes anything resembling value for money.
Based on how the estimates have gone up, it would appear not to represent value for money. But if the early estimates were naively wide of the mark to begin with, perhaps was always going to cost the guts of €2bn anyway. Delays have been a factor. Politicking has been a factor. But the central problem remains with state procurement and capital expenditure. What is the budget and what do you do if it goes over budget?
The problem is there is no budget for the National Children’s Hospital. If there was, its build would have been adjusted to stay within its original budget. If someone wants to build an extension to their home, they have a budget, they tender and they build.
If prices start to go up along the way, they allow a small bit of financial wriggle room but they scale back the furnishings or other specifications to stay in budget. It is called the real world. When it comes to the State building roads, infrastructure, tunnels, transport, schools or hospitals, these basic financial principles don’t seem to apply.
Just watch Room To Improve on TV. It’s all there. The Government’s National Development Plan envisages a €115bn capital investment programme. Does that mean it will end up being double that or should we plan for half that knowing €115bn will be the final bill? Ask Dermot Bannon – or maybe not.
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