Takeaways: A new era awaits. The Fed’s final QE hurrah was flagged, but we expect more market discretion, volatility, disruption and currency oscillation without this safety net. The cost of debt capital will rise. Weaker/exposed nations and companies can expect a rougher ride. Brazil and Turkey look exposed. AQR ran just about to script, but banks with passes won’t automatically start lending more –borrowers will still need to explore the alternatives. Meanwhile, companies are finding this a tough economy to compete in and read, as the latest rise in profit warnings shows. They need to catch-on soon, shareholders are losing patience.
Understanding and navigating risks and identifying and exploiting opportunities are the core capabilities of any competent investor or company executive. Yet, we currently see both groups struggling, being hypnotised by over-blown potential risks and paralysed in the face of potential growth opportunities. Continue reading
As several recent surveys, including our own Capital Confidence Barometer, have shown, there is a heightened perception of risk for both the investing community and those executives charged with running our largest companies. This risk is comprised of many different strands: geopolitical, financial, regulatory, and even medical. It is important that we can recognise and appreciate these risks; but equally important that we react appropriately in the face of each and not overreact.
According to EY’s 11th bi-annual Global Capital Confidence Barometer (CCB), 40% of companies anticipate pursuing acquisitions in the next 12 months – the highest number for three years. More robust market conditions and expanding deal pipelines should see global M&A return to 2006 pre-crisis volume and value levels after a five-year deal slump. While 2014 has been notable for high-profile mega-deals, the Barometer suggests that mid-market M&A will provide significant lift to deal activity. Almost two thirds (60 %) of respondents expect deal volume to increase further in the next 12 months – even after a relatively positive 2014 for M&A.
Season of mists and reality checks
Last week brought a familiar September market swoon, including a 15-month low for the FTSE and the highest spread between high-yield and investment bonds since July 2013. Risk appetites – if not completely unwinding – are becoming more discerning.
Markets are in ‘risk-off’ mode. Weak surveys highlight the continuing struggles of the Eurozone to grow at all and of China to grow enough to meet its targets without blowing bubbles. Meanwhile, Eurozone banks have largely eschewed the ECB’s offer of cheap cash for lending for now – they may pick up more after the AQR. The Fed has also thrown a spanner into the works after hints of faster rate rises. But, above all, it’s the geopolitical uncertainties that are troubling markets and investors. And that list of uncertainties now includes the UK.
Ifs, buts & mibbes
It’s a truism that markets hate uncertainty. Flat calm brings its own complications – certainly for those who need volatility for margin and volumes. However, it’s hard to imagine many welcoming this week’s uncertainty play. The Federal Reserve and Scotland top the bill and the Fed isn’t even the main event. That’s partly due to expectations of Fed subtlety – if it changes tack at all; but its upstaging is also due to the growing import and unpredictability of the Scottish question.
At the time of posting, the Scottish independence referendum outcome is too close to call. But, whatever the result, nothing will be the same for the UK body politic again. Each outcome is loaded with further negotiations and each has its own complications. Furthermore, a Pandora’s Box of nationalism has been open – with repercussions for the rest of the UK and beyond. Friday is by no means the end of the journey.
The Scottish referendum, alongside conflict in Ukraine and the Middle East, monetary tightening and the Eurozone’s woes constitutes the OECD’s latest uncertainty list and the key drivers for its latest growth downgrades. Just one major economy – India – is upgraded in its latest round of forecasts. Although, there remain concerns over the sustainability of the undoubted Indian revival and – in common with other emerging markets – India’s ability to weather the Fed’s next move. I doubt that Janet Yellen et al will be upstaged for long.