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Greater M&A activity a sign of increasing recovery in US and UK’

Wednesday 4th June 2014

After Standard Life’s prediction of an M and A expansion in 2015, Andy Brunner, Investment Strategist at Morningstar OBSR commented that the activity is a sign of increasing recovery in the USA and UK markets.
He said: ”Going forward, we expect US stock prices will gradually trend higher, albeit in a relatively volatile fashion that should prevent aggressively bullish sentiment developing. In terms of earnings guidance, the data has been poor but should soon reach an inflection point. Improving trends in the economy should positively impact the profits outlook and set up markets for a better second half. With the economy back on course, a cyclical bias is maintained and the value rally should continue.
“M&A activity is also on the rise, which together with sizeable share buybacks, should also prove supportive to markets. This is not the M&A of old using highly priced equity, but instead exceptionally cheap debt. Importantly though, there is ample corporate cash available for capital investment, although this may not take the form of the past given that today a higher proportion of investment is spent on productivity-enhancing technology rather than traditional plant, machinery and buildings.
“Stock market trends in the EU and UK are not expected to be overly dissimilar to the US. Many of the same issues apply with regard to valuations and earnings i.e. they need to grow into them.
“No immediate QE is expected in the EU but is certainly a second half possibility. The macro background has improved considerably in recent months and Germany could soon be back to trend growth. Profits are set to increase significantly and equities are much closer to fair value than in the US.
“M&A is particularly important in the UK stock market as large cap valuations trade at a significant discount, especially to those in the US, where corporations have big offshore cash piles (M&A is very tax efficient), borrowing is cheap and CEO’s are now very keen to do deals. Many UK companies have sizeable overseas operations and less regulatory obstacles to foreign based acquisitions. UK domestic stocks have probably seen the best of the good times for now and there is also the risk of an earlier rate rise, while political uncertainty should build. The FTSE100 looks a better bet than small and mid-caps going forward, with higher yielders with growing dividends also favoured.”

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