Commercial Awareness Update 30th January by Ben Triggs

1. Trump’s first week

Donald Trump took little time to stamp his mark as the new US President and in the process repealed a number of initiatives driven forward by Barack Obama. On his first day, he upheld his election promise and abandoned the Trans-Pacific Partnership (TPP). The TPP was a proposed economic relationship between 12 countries that bordered the Pacific Ocean, which would slash tariffs and boost trading across the region. Countries involved include Japan, Australia, Malaysia and Mexico, and in total represented 40% of the world’s economic output. Eventually, the plan was to create a new single market, but it needed all 12 nations to ratify it – only Japan had done so thus far. As the driving force behind the deal, America’s decision to pull out of the partnership leaves the TPP highly unlikely to happen.

On Wednesday a further “Trump rally” in the markets pushed the Dow Jones above 20,000 points for the first time in its history. The S&P 500 and Nasdaq also reached new highs, as the markets believe Trump’s economic policy will provide a boost for business. The Dow Jones Industrial Average shows the average share value of 30 large industrial stocks or blue chips across a range of industries. Trump’s initial plans on infrastructure and deregulation has given investors confidence in the US economy, especially in banks. Goldman Sachs’ share price is up 30.4% since the election in November.

In social policy Donald Trump came up against a huge backlash after signing an executive order banning citizens from 7 predominately Muslim countries from entering the USA. People hailing from Iraq, Syria, Iran, Libya, Somalia, Sudan and Yemen will not be allowed to enter the USA for the next 90 days and many commentators suggest this will pave the way for a permanent ban. The President has also suspended the US refugee program, stopping the admission of all refugees to the United States for four months. This decision has been met with widespread condemnation and protest across the world. A federal judge in Brooklyn ruled to block part of the ruling, preventing the government from deporting arrivals already in the USA with valid paperwork.

Questions to ask yourself… Will the global condemnation of Trump’s social policy have an impact on the US economy? Why was the TPP so unpopular in America? 

2. Government loses Brexit ruling

Last week the Supreme Court dismissed the Government's appeal on triggering Article 50, meaning Parliament has to be consulted before the UK starts the formal process of leaving the EU. All 11 justices were present at the hearing and ruled against the Government by a margin of eight to three. Therefore, a bill will have to be bought to both the House of Commons and House of Lords for debate and a vote. This is a major blow to the Government’s plan to start the formal leaving process by April. However, commentators suggest draft legislation has already been prepared and it’s expected to be a short bill. Plus, according to the ruling, the Scottish Parliament and Welsh and Northern Irish Assembly don’t need consulting on the matter.

The Labour Party, Liberal Democrats and other opposition parties are likely to demand time to fully debate the issue, therefore holding the Government fully to account and slowing down the process. Labour leader Jeremy Corbyn has encouraged his party to vote with the Government on the Brexit bill, which has led to a further revolt within the party. MP Jo Stevens quit the shadow cabinet over the issue and two Labour whips have refused to vote in favour of the Article 50 bill – whips are members of a party tasked with ensuring MPs vote in accordance with the official party line.

Questions to ask yourself… Can major political parties justify voting against the bill after the public voted to leave the EU? Should devolved regional powers have a say on the issue?

3. BT shares drop 20% in a day

On Wednesday, £8 billion was wiped off the value of BT’s shares as the extent of an accounting scandal in their Italian division was revealed. It is alleged the managers in Italy were depressing costs, allowing them to report increased profits. BT announced write downs of £145 million last year after investigating the accounting in the Italian division, but in a new statement now believed the accounting error could equate to £530 million. The 20% wiped off the share price is the biggest single fall in their share price since it was privatised in 1984. BT has also suggested a decline in government contracts in Britain is likely to decrease earning this year.

The scandal was a significant factor in BT’s third quarter profits falling by 37% compared to the previous year. The firm’s reputation has been dented, especially amongst the 700,000 small investors in the firm. The sharp fall in share price reflects a lack of optimise in the future of the corporation, as well as a mistrust.

Questions to ask yourself… What can BT do to turn around their fortunes and regain trust? Does the accounting scandal show a lack of leadership from the global head office?

4. Alphabet miss profit expectations

Google’s parent company Alphabet’s share price fell as they announced lower than expected profit figures. Revenue increased by 22% in the last quarter of 2016 compare to the previous year, with significantly more advertising revenue coming from YouTube and mobile phones, but this led to just an 8% increase in profits. Alphabet’s share price has fallen by almost 3% since the announcement.

The lower than expected profits is largelt due to an increase in costs and their tax rate. A one-off tax payment pushed the company’s effective rate to 22%, which was much higher than the previous year and expectations. Despite the profit results, Alphabet had a strong quarter and beat revenue targets for many of its key products.

Question to ask yourself… Which products will be essential for Google in the future?

5. Danish drug company to invest in the UK

Danish pharmaceutical company Novo Nordisk has committed £115 million to a new drug research centre in the UK. Based in Oxford, the firm will employ 100 scientists to investigate new approaches to treating type-2 diabetes. Many commentators suggest this is a vote of confidence in post-Brexit Britain’s scientific research sector. The government has just announced an extra £4.7 billion of funding in the life sciences sector over the next few years. With this funding and Oxford University’s reputation as a world leading institution encouraged Novo Nordisk to commit to the UK.

Many believe Brexit will make some companies think twice about investing in the UK, but it could be a logical move for many foreign firms. Since the Referendum the pound has decreased in value, making investing in the UK more viable. In this case, the Danish Krone is much stronger compared to the pound than it was a year ago, so it’s cheaper for the company to acquire or build research facilities and pay scientists in the UK.

Questions to ask yourself… Why is it important the UK maintains its position as a leader in scientific research? Should this investment be seen as a sign of post-Brexit strength?