Global M&A is booming, but tie-ups between UK companies are running at the slowest pace since at least 1969.
UK domestic M&A (UK companies buying other UK companies) amounted to just 31 deals in the third quarter, according to data from the Office for National Statistics. That's the lowest quarterly tally since the ONS began compiling data more than four decades ago, writes Joel Lewin.
In the first three quarters, the number of deals edged up from last year to 98. However, that is far shy of the 222 deals struck in the same period of 2011, and is well behind the level of activity seen in 2010 and 2009.
The value of deals has fallen 22 per cent year-on-year to £5bn.
But it's not just UK companies that have been overcome by a bout of home-grown M&A aversion in Blighty. Acquisitions of UK companies by overseas partners fell 53 per cent year-to-date to £15bn, the lowest volume since 2003.
But while UK companies have turned their noses up at their fellow countrymen, they have been snapping up overseas companies at the fastest pace in five years.
Acquisitions of overseas companies by UK companies in the first three quarters surged 150 per cent to £22.1bn, the largest volume since 2010.
Globally, M&A volume stood at $4.57tn at the end of November, and looks set to surpass the record $4.61tn set in 2007.
Limited upside to US equities. Equity upside will be closely linked to earnings growth delivery. We expect S&P 500 to reach 2,200 by year-end 2016, with an EPS target of $123. This implies 4-5% upside in price and 3-4% upside in earnings. Negative earnings effect from energy is likely to fade away, but strong USD will continue to exert some drag
causing further negative revisions to current 2016 earnings growth estimates of 8.5%. Equity multiple will be limited from re-rating much higher, in our view. The market is of age and already trading at close to 18x (NTM) P/E.Expect a volatile path—VIX to rise from current level of ~15 to an average of 16-18 in 2016. Higher volatility forecast is based on the rates cycle and uncertainty around central bank policy and extremely low levels of market liquidity. While equity volumes look robust, market depth has declined by more than 60% over the last 2 years, limiting market capacity to absorb large shocks. We forecast higher level of tail risk—a measure of volatility of volatility—with both quiet periods and periods of volatile sell-offs such as August this year as likely. High levels of geopolitical risk will also add to market volatility.Macro crowding—change in market leadership is warranted. Central bank policy divergence and related macro trends have fueled one of the strongest momentum trades across equities since early 1980s. These macro trends—strengthening USD, weakening commodities and EM assets, falling bond yields—are closely intertwined across markets and asset classes. They’ve had a strong impact on equities. Even though S&P 500 has been range-bound for most of 2015, at the stock level winners have continued to win and losers continued to lose driven by macro forces. In many areas of the market this momentum trade has persisted for several consecutive years. Consumer Disc, for instance, has outpaced Energy in each of the last 7 years, cumulatively outperforming by more than 260%.This equity trend can also be viewed across style performance. Momentum—closely resembling Low Volatility, but also Growth and Quality styles—outperformed Value by 31% from mid-2013. Momentum is extremely expensive and crowded—valuation spread between Momentum and Value is at historical extremes and dispersion among high momentum stocks is low and falling. Also, the much anticipated Dec. rate hike is a risk to Momentum and a boost to Value, which is seasonally strong around the turn of the year. See Figure 211 for detailed screens of Momentum related “Stocks to Avoid”.How much further can the current macro divergence persist for and have market expectations already run too far ahead? Several of these equity trends are relying on anticipated central bank actions that would boost the USD and further weaken commodities and EM assets. The risk of this increasingly one dimensional positioning, not just by equityinvestors, but also by macro funds, CTAs and risk parity portfolios, is that these trends don’t materialize and trades simply become too crowded and bound to sharp reversals. An example of such crowded and complacent macro positioning was 12/3 post-ECB reaction, where EUR/USD shot up by ~4% intraday (4.9 std. deviation event) and had the 2nd biggest daily move since its inception. While it’s hard to pin-point the exact timing of this rotation, we suggest investors start rotating from expensive, crowded and macro-driven equity Momentum plays towards Value, both across and within sectors. See page 99 for screens of “Stocks to Favor” with more reasonable valuation as part of this rotation.In line with the above views, at the sector level we continue to favor Financials and Technology, and are upgrading Energy to OW from Neutral. We are downgrading Healthcare from OW to Neutral, and maintain a Neutral stance on Materials, Cons. Staples and Cons Disc (recently downgraded). We stay UW Utilities, Telecom and Industrials.
House GOP Bill Includes REIT-Spinoff Ban
Proposal part of larger plan to revive and extend dozens of expired tax breaks through 2016
WASHINGTON––House Republicans have proposed banning a popular technique that lets companies spin off their property holdings into tax-advantaged real-estate investment trusts.
A bill released late Monday night by the chairman of the House Ways and Means Committee would ban the technique, effective immediately. The proposal is part of a larger plan that would revive and extend dozens of expired tax breaks through 2016, and its fate will be decided in the frenzied final few days before Congress adjourns. Its inclusion in what lawmakers have described as the fallback plan signals at least some consensus on the REIT issue.
REIT spinoffs, often urged by activist investors, have become popular in recent years among retailers, restaurant chains and casino companies. Darden Restaurants Inc., the owner of Olive Garden restaurants, completed one last month. Macy’s Inc. and McDonald’s Corp. have resisted investors’ calls to follow along.
The Internal Revenue Service has raised warnings about some spinoffs and said in September that it was considering new rules. The bill from Rep. Kevin Brady (R., Texas), the Ways and Means chairman, would prevent the technique and prevent spun-off companies from converting into REITs for 10 years. It also contains several other changes to the REIT rules.
Robert Willens, a New York-based tax adviser, said in an email Tuesday that he understood the concerns about whether REIT spinoffs truly separate the real estate from the rest of the business, because they are so interrelated.
“I think it’s dangerous, and totally unwarranted, to deny tax-free status to a spinoff based purely on the ‘identity’ of the parties to the spinoff,” Mr. Willens said of the proposal in Mr. Brady’s bill. “I’m not a fan of this proposal and would hope that ‘cooler heads’ prevail here and the proposal never gets enacted.”
Vivendi does not exclude taking control of Gameloft
Vivendi announced today (8 December) that it now holds 26.69% of the share capital of Gameloft, a French company with internationally recognised know-how in mobile gaming. This participation represents a total of 22.7m Gameloft shares acquired on the market for a total amount of EUR 111.6m.
A statement from the company said, "No decision has been taken at this stage regarding a potential public tender offer on the Gameloft shares. In the course of the coming months, Vivendi intends to favour a constructive approach enabling both parties to consider fruitful cooperation. If such an approach does not lead to a favourable conclusion, Vivendi would not exclude taking control of Gameloft.”
Limited upside to US equities. Equity upside will be closely linked to earnings growth delivery. We expect S&P 500 to reach 2,200 by year-end 2016, with an EPS target of $123. This implies 4-5% upside in price and 3-4% upside in earnings. Negative earnings effect from energy is likely to fade away, but strong USD will continue to exert some drag
causing further negative revisions to current 2016 earnings growth estimates of 8.5%. Equity multiple will be limited from re-rating much higher, in our view. The market is of age and already trading at close to 18x (NTM) P/E.
Expect a volatile path—VIX to rise from current level of ~15 to an average of 16-18 in 2016. Higher volatility forecast is based on the rates cycle and uncertainty around central bank policy and extremely low levels of market liquidity. While equity volumes look robust, market depth has declined by more than 60% over the last 2 years, limiting market capacity to absorb large shocks. We forecast higher level of tail risk—a measure of volatility of volatility—with both quiet periods and periods of volatile sell-offs such as August this year as likely. High levels of geopolitical risk will also add to market volatility.
Macro crowding—change in market leadership is warranted. Central bank policy divergence and related macro trends have fueled one of the strongest momentum trades across equities since early 1980s. These macro trends—strengthening USD, weakening commodities and EM assets, falling bond yields—are closely intertwined across markets and asset classes. They’ve had a strong impact on equities. Even though S&P 500 has been range-bound for most of 2015, at the stock level winners have continued to win and losers continued to lose driven by macro forces. In many areas of the market this momentum trade has persisted for several consecutive years. Consumer Disc, for instance, has outpaced Energy in each of the last 7 years, cumulatively outperforming by more than 260%.
This equity trend can also be viewed across style performance. Momentum—closely resembling Low Volatility, but also Growth and Quality styles—outperformed Value by 31% from mid-2013. Momentum is extremely expensive and crowded—valuation spread between Momentum and Value is at historical extremes and dispersion among high momentum stocks is low and falling. Also, the much anticipated Dec. rate hike is a risk to Momentum and a boost to Value, which is seasonally strong around the turn of the year. See Figure 211 for detailed screens of Momentum related “Stocks to Avoid”.
How much further can the current macro divergence persist for and have market expectations already run too far ahead? Several of these equity trends are relying on anticipated central bank actions that would boost the USD and further weaken commodities and EM assets. The risk of this increasingly one dimensional positioning, not just by equity
investors, but also by macro funds, CTAs and risk parity portfolios, is that these trends don’t materialize and trades simply become too crowded and bound to sharp reversals. An example of such crowded and complacent macro positioning was 12/3 post-ECB reaction, where EUR/USD shot up by ~4% intraday (4.9 std. deviation event) and had the 2nd biggest daily move since its inception. While it’s hard to pin-point the exact timing of this rotation, we suggest investors start rotating from expensive, crowded and macro-driven equity Momentum plays towards Value, both across and within sectors. See page 99 for screens of “Stocks to Favor” with more reasonable valuation as part of this rotation.
In line with the above views, at the sector level we continue to favor Financials and Technology, and are upgrading Energy to OW from Neutral. We are downgrading Healthcare from OW to Neutral, and maintain a Neutral stance on Materials, Cons. Staples and Cons Disc (recently downgraded). We stay UW Utilities, Telecom and Industrials.