The US have been bearish on growth based on the consumer slowdown and the sub-prime crisis, yet the ...
The US have been bearish on growth based on the consumer slowdown and the sub-prime crisis, yet the risks of a spillover to the rest of the economy have been downplayed and, as yet, not been reflected in world market levels.
Nevertheless, today's economic environment of rising oil prices and a crisis in the Middle East, combined with an inefficient US president, is reminiscent of the late 1970's which saw the US enter into an extended period of stagflation. Oil prices have almost doubled since April 2004 and the US Federal Reserve chairman Ben Bernanke recently warned that inflation remained 'uncomfortably high' leading investors to question whether stagflation is about to return. Recent numbers also suggest that capital investment is declining.
Yet despite this backdrop of economic uncertainty, we remain cautiously optimistic. Mergers and acquisitions (M&A) activity continues at record pace with the first quarter of 2007 seeing more activity, particularly in Europe and America, than during the same period in 2006. Indeed, M&As have been at the forefront of the equity market rally, driven by interest from trade buyers as well as financial buyers such as private equity funds and, with the cost of debt still very low and valuations remaining relatively attractive, there are no signs of it abating.
Going forward, we anticipate private equity will concede more ground to the corporate sector in the M&A arena, with the synergy benefits of the latter making it easier to conclude deals relative to private equity. The cost of funding for private equity is rising.
Another factor supporting the cycle is the surge in shareholder activism. This is gathering momentum, most recently demonstrated by Cadbury's, which saw its share price rise by 10% last month after financier Nelson Peltz bought a 3% stake in the confectionary giant, sparking takeover/break-up speculation. This reaction has generated interest in other companies such as Unilever and BP, which also have the potential to restructure and thus create more shareholder value. On the age-old issue of small cap versus mid cap versus large cap versus mega cap, we believe that for the first time in four years, mega caps warrant a closer look. Mega companies such as the oil giants, telecommunications companies and banks are looking very cheap. But where banks are lacking a catalyst for significant outperformance, we are keeping a close watch on telecoms such as Vodafone and oil companies such as BP.
(post Lord Browne) which could become the subject of the aforementioned restructuring activity, potential break ups and issue larger share buybacks. Overall we favour increasing the pay-out ratio for dividends.
Another sector which is generating interest and where we remain overweight is resources. Resources and, in particular, mining companies, continue to be supported by the commitment to infrastructure spending in China, India and Russia. Xstrata and Anglo American remain our two favourite stocks in this area.
FCA consultation response
MoneyLens to be edited by former Mail on Sunday journalist Vicki Owen