Riding the cycles

Riding the cycles

Takeaways: With Hellenic worries on the back burner, equity markets have flirted with new highs. However, geopolitical machinations continue to provide reality checks and Greece will be back – soon. The commodities sector is obviously still coming to terms with new economic realities. M&A activity dipped in metals and mining again in 2014; but deals should be part of the restructuring armoury as the sector gears for recovery. Elsewhere, the imperative to transact remains strong and activity remains buoyant. The opportunities presented by diverging economies and monetary policies are also coming to fruition, as the euro and Eurozone yields fall and US companies arbitrage. Companies can make hay in this low yield environment; but there are signs of high yield disquiet – in words, rather than volumes. Continue reading

High noon at the O.K Brussels….

Takeways: At pixel time….Greece is offering an olive branch (of sorts) and markets are up. That said, investors didn’t seem perturbed by the breakdown of Monday’s talks. This isn’t 2011. The Eurozone economy is growing, banks are stronger, markets are flush with liquidity, backstops are in place and Greece’s debt is mainly ‘official’. With the right deal, the Eurozone (or parts thereof) could, conceivably, kick on to become the turnaround story of the decade….may-be…The argument against such sangfroid are that this particular olive branch (previously rejected) would just reset the countdown; the Eurozone still appears to have trouble ‘baked in’ and unwavering central bank support is intensifying riskier market behaviour. Greece’s travails shouldn’t topple the Eurozone and there is significant potential for growth; but GREXIT or not, European opportunities need careful picking.

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And Greece is the way we are feeling…

Takeways: No deal and still we wait on Greece’s fate.  Markets seem nonplussed. Is this faith in an 11th hour agreement or in sufficient mitigating factors? Both seem risky assumptions and no deal can ‘cure’ Greece overnight. Meanwhile, a tremendous amount of uncertainty remains elsewhere, not least in the volatile oil price and currency markets. The divergence theme we introduced last year is becoming a serious pain in the profits for US companies, as jobs figures shine. With sterling at a seven-year high against the Euro, currency remains high on UK corporate agenda’s too. Companies are recognising the need to adapt to this changeable world by looking at elements that they can control – like working capital – and using M&A to meet new strategic challenges.

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Tick-tock! Chop-Chop!

Takeways: Countdowns and markdowns. Less than a month before the crunch on Greece; 90 days until the UK General Election; who knows on the Fed – US data is still mixed. Meanwhile, Russian ratings drop again and the head spinning loosening of monetary policy continues. Cue more currency volatility, negative bond yields, higher pension deficits and accumulating risks. These are unpredictable times and it might seem odd for companies to be focusing on M&A. However, rising levels of currency, demand and price volatility are forcing companies to look across their portfolio and think about the ‘where’ as much as the ‘what’.

Brussels hold ‘em

The meeting between the Greek Finance Minister and the ECB’s President was billed as the master of game theory versus the poker-faced Euro-saviour. Neither side gave much away during the first hand, but this is a game of high stakes that could run until someone goes all in.

On Monday an FT interview with the chief Greek protagonists boosted market hopes of a swift resolution. The proposal of what is effectively a ‘debt for equity swap’ via new growth-linked bonds, with a (smaller) permanent budget surplus and a plan to target wealthy tax-evaders sounded…well….like a proposal from advisors to a distressed company. The government had engaged Lazards. They were planning a tour of creditors. Markets reacted with positive surprise. It was as if they’d expected members of the newly elected Greek government to turn up with placards or in a wooden horse. Even the Adam Smith Institute approved.

The situation is obviously extremely fluid – as they say in 24hr news circles – but as we post, positive expectations are dashed. In truth, it was never going to be that easy. For the Troika and Berlin, the terms of the bailout were set in stone –as their latest hardball statements and actions confirm. So, this is where we are:

  • Greece’s bank life-line, support via the emergency liquidity assistance (ELA) mechanism, is in doubt beyond 1 March, when the bailout extension expires. 
  •  Frankfurt and Berlin’s hard-line is exemplified by the decision by the ECB to remove a waiver allowing Greek sovereign debt to be used as collateral for cash. That’s a big pile of chips they’ve pushed in. Meanwhile, documents prepared for the Eurogroup meeting in Berlin confirm that the German government will not tolerate any ‘rolling back’ of the existing austerity measures: 

    “The Eurogroup needs a clear and front-loaded commitment by Greece to ensure full implementation of key reform measures necessary to keep the programme on track” 

  • Removal of the ELA backstop leaves a big gap between 1 March and a new deal on debt – assuming this can even be achieved. This could trigger a Greek coalition breakup–to form group than can accept the ECB’s terms – or a force a new election.

There is a long road before any GREXIT, but there’s obvious potential here a rocky few weeks before a deal –if we get a deal. 

Is there a way through this impasse? Lowering of the primary surplus requirement is probably the most crucial component for Greece. The real sticking point will be Syriza’s reigning back on previously agreed measures, like privatisation and raising the minimum wage. A deal is possible. The recent ‘Stability and Growth Pact’’ acknowledged the need for increased domestic demand to diminish debts. Syriza will probably have to accept primary budget surplus closer to the current 4.5% than the 1% it wants. It will need to offer up more reforms.

Interestingly, fellow bailout nations are taking some of the hardest lines, as they blanche at Greece apparently escaping their austere fate. However, it would be beneficial to all if Greece didn’t keep coming back like a bad cent and, crucially, show that compromise is possible, even between the most unlikely of bed-fellows. Given recent political developments – and rising levels of global debt – it’s not a bad example to set.

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According to McKinsey & Co, global debt has increased by $57tn since 2007 to almost $200tn – up as a share of GDP from 270% to 286%. Ireland’s debt to GDP ratio – including household, non-financial corporate and government debt – is up by 172% since 2007. Greece is up 103%, Portugal 100% and Spain 72%. Mckinsey calls for “fresh approaches” to preventing future debt crises. Is it time for a broader debt debate?

The good, the bad and the ugly of (even easier) easy money

  • Number of central banks who have eased so far in 2015: 16
  • Amount of government bonds trading with negative yields: €2.5tn (RBS)

The currency surrender continues and yields continue to tumble. It is getting hard to remember what it was like before monetary policies became the chief defence against our economic ills; but even in the context of the last five years, the first few weeks of 2015 have been exceptional.

Those effectively being paid to borrow are enjoying the ‘good’. Borrowers like Germany Switzerland and Nestlé, whose 2016 Eurobond is the first corporate bond of a year or longer to have a negative yield. Europe’s relatively small financial, sovereign and investment grade market is squeezed when investors seek havens, even further when ECB promises €60bn a month of buying and even further when deflation hits. The ECB haven’t even buying started yet and they’re not buying corporate bonds, but high sovereign demand is pushing investors into other markets. After all, Nestlé has the same rating as France.  It feels like a great time to refinance. This flow of cash seeking assets should also help banks clear some problem debts.

The bad news is that many of these companies will also be struggling with their pension deficits – at a record high in the FTSE 350, according to Mercer. As we discussed last week, currency fluctuations are also a constant worry. The ugly? The trip back up again to normality – whenever it comes. The potential consequences of investors chasing yield when exit options are limited.  Yields for BB rated nonfinancial corporate bonds are down to 2.62%, according to Barclays. Although yields at ratings below BB haven’t felt so much of the QE effect – greater discretion is still a theme of 2015.

UK bank lending to rises despite uncertainty

All of this adds up to lower margins and a struggle for profitable growth for banks. However, economic growth should be enough to spur UK banks to resume lending growth in 2015, according to the EY ITEM Club. However, lending growth will be slow and alternative finance providers will retain – and expand – their foothold. Indeed, the trend across Europe is for bank disintermediation. According to S&P, the European direct lending market–where dedicated credit funds lend directly to predominantly sponsor-owned businesses—grew to more than €10bn across more than 200 deals in 2014, from about €5bn a few years ago. Companies in the mid-market now have a far wider range of borrowing options open to them.

Resilient M&A

Our figures show that global M&A began 2015 with a bang, recording the highest deal values in January since 2008.  A few themes we’d pick out. Firstly, the continued focus on ‘big ticket deals’. Boardrooms are still interested in transformative M&A and still have the confidence to pursue substantial acquisitions. Secondly, the high number of deals focused on corporate restructuring and spin-offs. Portfolio management is high up the agenda in 2015.  Thirdly, the rise in cross border deals – at their highest in January for nine years. There are obvious opportunities – and risks – in increasing monetary and economic divergence. It’s a good time for companies to think about how they can use M&A to build resilience, through geographical coverage as well as their product portfolio.

 

And that was just January…

And that was just January…

Takeways: We said 2014 might look pedestrian in comparison, but that was some start to the 2015 rollercoaster. Oil prices below $50, ECB taking a QE leap, a new Greek government with debt ‘requests’,  Swiss Franc rising 14% in one day, the IMF’s biggest global growth downgrade for three years…. This is still a recovery, but it’s obvious that this amount of policy change, volatility and uncertainty will affect companies’ ability to plan, forecast and finance. It’s something we saw developing at the end of 2014 with a 6-year high in profit warnings. Currency markets in particular look set for significant swings. Contracts may not be inked so readily in uncertainty. Equity markets are hesitant despite ECB largesse. It underlines the importance of building in operational and capital resilience – and flexibility. And of seeking out opportunities amid policy divergence – Eurozone assets/debt are looking cheap(er) from the outside.

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Central banks take centre stage….

Takeaway: Central banks take centre stage as the spotlight moves back to the Euro –  via the Swiss Franc
It was almost inevitable that the upbeat tone driving capital markets activity in the first two weeks of the year would be broken, but the nature in which it was broken was anything but expected.  In a week dominated by macro-economic and central bank news flow, markets are now picking through the details – and potential ramifications – of the ECB’s Quantitative Easing (QE) plans announced yesterday.

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Key trends & drivers for 2015 already making waves

Takeaways: Some of the trends for the year discussed last week are already apparent in events during the first weeks of 2015. Innovation is driving IP-centric M&A and divergent economic performances is showing where future stress points may appear.

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