Archive for February, 2013
A month ago we looked at stock market earnings, observing that strong growth in reported EPS was an important boost to sentiment. And this month has seen signs of a rebound in merger activity. (Stock markets, of course, like to see companies spending money on takeovers at least as much as they like to see them making it to begin with.)
Liberty Global’s offer for Virgin Media is set to be one of the biggest UK deals of recent years. Over the Atlantic, plans were announced to take Dell private, and days later, Warren Buffett and buyout firm 3G Capital revealed they had got together to gobble up Heinz.
In fact, Bloomberg data shows that over $190bn worth of deals have been announced so far this month. That’s comfortably above the monthly average since the recession began in 2008, and continues the trend of increased deal flow following the 2011 stock market crash.
The specifics of these deals remind us that it isn’t just stock markets and investment banks that like takeovers. As well as the Heinz deal, private equity firms are lining up behind the Dell buyout and others. The legal profession benefits too: Virgin, Dell and Heinz are all being sued by investors.
Finally there are the companies themselves. Last year saw balance sheet cash and cash equivalents per share for the MSCI World Index of developed country stocks reach yet another record high. It may be a truism of the modern era that most acquisitions fail to add shareholder value, but even the most hardened cynic would agree that some takeovers do represent a worthier use of managerial imagination than writing cheques to investors.
We have grown used to years which get off to false starts. But there is a chance that the corporate cash pile and the resurgence of equity investment could add up to something materially constructive in 2013.
We are only 46 days into 2013, but it feels as though markets have covered a lot of ground already. The FTSE 100 index is up 7.5% so far, which would make a decent positive return for a full year. So it is something of a relief that risk assets have had their exuberance contained in the last week or two by weaker than expected Q4 growth numbers from the major developed economies (the US at the end of last month, Japan on Wednesday and the eurozone a day ago).
With all the excitement we have been enjoying in equity markets, however, it has been easy to overlook the more mundane – and in some cases, divergent – pricing behaviour of other assets.
Oil, for example, is only $4-$5 a barrel higher, and remains well below the levels reached in early 2012. The story is similar for industrial metals.
Precious metals have been more enigmatic. Silver had a strong January but has since fallen to where it ended last year. Gold shrugged off the euphoria last month to begin the year flat, before dropping just shy of 3% in dollar terms in what we have seen of February so far. Both metals remain on the downward trajectories established for them since risk assets began to recover a few months ago, but the shorter term dislocations and contradictions are as mystifying as ever.
More mystifying still has been the behaviour of credit. Safe haven government bond markets have been acting as one might expect: 10 year yields in the US, Germany and the UK are 25-35bp higher on the year so far. But investment grade credit spreads, as measured by the Markit iTraxx Europe index, are barely narrower from December’s close. At the same time, the rally in emerging market debt has stalled, with the JP Morgan EMBI Global spread a few bp wider.
Currency markets, more reassuringly, are aping equities in that they have also paused for breath this month after following a consistent pattern. The euro rallied strongly, and has now faltered. The yen continued its sharp decline – which has slowed. The world’s new-found and startling allergy to sterling has stabilised. All this could tie rationally in with improving sentiment over the world economy (now paused) and the abandonment of safe havens (ditto).
The economic outlook, as always, is uncertain. Those GDP numbers we’ve seen of late have not been encouraging. But other data has been positive: on American jobs, Chinese activity, European (and UK) sentiment … So far, despite the hiatus, and the short term dislocation in risk pricing between some asset classes, markets are giving the world the benefit of the doubt.
This blog is inclined to agree with them. There is one market we have been following for some time: the peripheral European bond market. Back in November ’11, when panic was the only thing some wanted to buy and Italian 10 year paper was hovering around 7-7.5%, we observed:
It was hugely significant during the recent [Aug 11] crash that Italy’s bond yields did not rise to dangerous levels. If they continue to hold their ground – or better yet, if confidence improves and they fall – catastrophic contagion in the eurozone is unlikely to occur. Talk about the banks, and haircuts, and credit derivatives is all very interesting. But if you really want to know how afraid to feel, just keep an eye on those bonds.
Year to date, spreads on Spanish, Italian, Greek and Portuguese debt to Germany have continued to narrow. This measure has survived the stall in equity pricing. In terms of absolute yield, Portuguese 10-year debt has fallen from almost 14% to a little over 6% in under a year.
Bond markets have decided that fear is not going to win this winter. As ever, their view is subject to the verdict of time. And as ever, the inconsistencies and dislocations we have seen emerging during the excitement of 2013 so far will be resolved – one way or another.
This was a phrase very commonly heard in relation to the financial crisis. From a number of perspectives it had merit: various key elements of the disaster were explicitly transatlantic (the sub-prime mortgage market) and several had distinctly American roots (rating agencies, structured credit products). Of course we shouldn’t lay all the blame at America’s door. Nonetheless, from fraudulent originators through hedge funds to investment banks and beyond, the detonators which set off the global explosion were made in the USA.
The release of the advance estimate of Q4 GDP data for the US this week reminded us that this huge economy, which remains the behemoth of the financial world, has lost none of its power to shock. Of the more than seventy economists tracked by Bloomberg, none expected output to fall. The consensus was for a 1.1% (annualised) rise. Since the data came out, reaction has been muted. Stocks have drifted lower. The dollar is a little weaker. But observers in America and around the world are broadly united in their dismissal of the release as a temporary blip.
They might well be right, but this was hardly the attitude taken when US GDP last disappointed back in the summer of 2011. Sentiment was more fragile, to be sure. The Greek crisis was weighing rather more heavily on the market then than it is today. And of course there were down-to-the-wire budget negotiations in Washington that tantalised with the prospect of an American sovereign default, prompting S&P to downgrade the country’s credit rating all the way from AAA to AA+.
But it was the revisions to growth that triggered the pandemonium. The S&P 500 had already fallen by 8% when the downgrade came. And the talk that followed was all about double dips and engines failing. With Europe in crisis, the US had been the great hope. One methodological change to statistics on imported petroleum later and that hope was swiftly and very sharply abandoned.
The situation today is therefore eerily familiar. The European crisis is forgotten, but not gone. Hopes for growth in the US are riding high again, and the S&P is some 17% above its June low. At the same time, growth has disappointed and budget negotiations are ongoing in Washington …
This is not to suggest, and still less to hope that there will be another shock of the 2011 magnitude. As yet the possibility of real slowdown in the US looks remote. This year we should see an acceleration in global growth and could see greater normalisation of pricing within and between asset classes. That’s the kind of thing we surely want to see starting in America.