04/02/12: Are we about to have a significant increase in M&A activity?
We hope that you had a great weekend. As we always do at the beginning of the market week, we wanted to give you a “look ahead” at a few items that we will be tracking carefully during the next few days. These are just a few opinions that we have, and as with life, nothing is certain about them.
First, here is a “week-at-a-glance” view of several key market drivers for the next five business days. Monday has President Obama hosting Canadian Prime Minister Harper and Mexican President Calderon while the Institute of Supply Management issues its manufacturing index for March. Tuesday will bring four key items: (1) Wisconsin, Maryland and Washington, D.C. hold GOP presidential primaries, (2) the Federal Reserve publishes meeting minutes, (3) data on sales of new vehicles for March and factory orders for February are due, and (4) The Association of Southeast Asian Nations opens a summit in Cambodia. On Wednesday, the ISM posts its service-sector index for March and officials of the European Central Bank are scheduled to meet. Thursday brings the release of chain-store sales for select retailers and The Bank of England concludes a policy meeting. Markets are closed on Good Friday, but the U.S. will report on non-farm payrolls and the unemployment rate in March.
What does this mean for investors? This week is a great example of how markets are driven these days from so many directions. Political influences, both domestic and international, seem to be as pronounced as they have ever been on markets and we expect that trend to remain throughout 2012. We will be watching the Friday unemployment data carefully, as this “zeros in” on the consumer confidence dynamic that is so important.
Eurozone unemployment hits a 15-year high as its PMI also contracts. The Eurozone jobless rate edged up to 10.8% in February – the highest in 15 years – from 10.7% in January. This translates into 17 million people out of work across that combined market. The jobless numbers were coupled with the eighth consecutive month of contraction in the Eurozone’s PMI manufacturing reading. Not only did the PMI reading fall to 47.7 in March from 49 in February, there was also a “spreading out” of the slowdown into the economies of France and Germany.
What does this mean for investors? Even though it has not been in the headlines quite as much lately, the Eurozone’s impact on financial markets in 2012 is far from over. Investors should remain diligent and not “take their eyes of the ball” with Europe’s continuing problems.
On the other side of the world, Chinese, Indian, Australian and Japanese manufacturing data profiles are mixed. Official Chinese PMI, which highlights larger factories, rose to 53.1 in March from 51 in February, although the HSBC index, which measures smaller factories, signaled continued contraction with a drop to 48.3 from 49.6. Factory activity was also weak in Australia and fell in India. Meanwhile, Japanese manufacturers remained pessimistic according to the Tankan Confidence Index.
What does this mean for investors? Like the Eurozone, the Chinese market is a massive driver of world financial markets, and when all of these Pacific Rim (plus India) countries are considered together, their impact is enormous. For sake of global growth and a continued strengthening of the world wide recovery, we do not need both the Eurozone and these combined economies just mentioned “pulling back” at the same time.
Are we about to have a significant increase in M&A activity? Global merger-and-acquisition activity started slowly in the first quarter, but there are signs that it may be about to accelerate. Globally, the first quarter saw about $545.2 billion of announced deals, the slowest start to a year since the first quarter of 2003. Most of the conditions for a healthy M&A climate are in place, including substantial cash reserves on corporate balance sheets, the ability to borrow money at low interest rates and the need for companies to keep their “top lines” growing. What may be most important, though, is CEO confidence. Simply put, CEOs must be willing to pursue deals in a climate where their boards will be accepting of such moves, and the past few years haven’t generated much confidence. Now that such confidence seems to be returning, you are beginning to see more dialogue between companies.
What does this mean for investors? To us, a good M&A climate is healthy. As was noted above, the pace of M&A is often directly correlated to the underlying confidence in the economy. Further, as many small to medium-sized companies are often the take-over targets with enhanced valuations, it is possible for investors to get the “random pop” to their portfolio if one (or more) of their holdings are in companies that others may desire to buy in the future.
If you have any questions or concerns about your investments in relation to the markets, please feel free to call or email me here.
Senior Vice President
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