Note: This article was published prior to Hewlett-Packard again raising its bid for 3PAR to trump Dell's for a second time.
In a month when the terms quantitative easing and toxic debt entered the Oxford Dictionary of English, and almost three years after the credit crunch first took, the UK stock market continued to be directed by economic concerns and sovereign debt fear. August suffered light trading volumes—in keeping with the summer tradition—that led to exaggerated market moves in response to corporate or economic news flow. Given that a large proportion of investors had cut their losses (or quit while they were ahead) and packed their bags for sunnier climes, the UK benchmark hasn’t fared too badly in what is traditionally a quiet month: the FTSE 100 is just 2% weaker over August.
The UK FTSE All Share enjoyed a relatively stable start to the month but a third of the way through investors gave into their bearish side in the face of sustained weak economic reports, particularly from the US. Numerous investment luminaries—including chief strategist Andy Brunner of OBSR, a Morningstar company, and Morningstar’s associate director of economic analysis, Robert Johnson—have pointed to a comparatively slim chance of the global economy dipping back into recession, but such optimism has largely fallen on deaf ears. US monthly employment data, released in the second half of the month, did little to assuage fears, instead pushing markets onto a downward slope that would continue up to the Bank Holiday weekend. The final full trading week of August saw a minor upward revision to the second estimate of UK gross domestic product in the second quarter. The British economy expanded 1.2% quarter on quarter, rather than the 1.1% initially estimated, outstripping performances from both the Eurozone region as a whole and the United States. Encouraging though this data is for those of us on this side of the Atlantic, the number has been overshadowed by the latest GDP reading from the US, which was revised down to 1.6% from the previous estimate of 2.4%.
Investor sentiment is clearly suffering a bout of negativity when it comes to the US and the depression looks set to remain in the absence of a substantial positive data surprise. However, this cloud has something of a silver lining for equities on this side of the pond, with asset allocators now viewing Europe as the cheapest global region. It seems the dark cloud that was hanging over Europe mere months ago has lightened to a paler shade of grey, with possible shafts of sunlight in certain areas.
Looking back over the past month, I don’t want to paint too poor a picture of market activity. One area where there has been a lot of excitement is mergers & acquisitions. As mentioned previously, August is traditionally a quiet month but this year has told a very different story. The insurance, natural resources and technology industries have all seen myriad takeover approaches in the recent weeks. Aviva confirmed this month that it rejected a £5 billion offer made at the end of July from rival RSA Insurance Group for its general insurance businesses in the UK. Since the news broke, French peer AXA has also been rumoured to be in the market for purchases and the UK’s Prudential has once again found itself ground through the M&A rumour mill. In another deal, HSBC this month announced it is in exclusive talks to buy up to 70% of South African bank Nedbank, which is currently majority-owned by Anglo-South African firm Old Mutual. In terms of share performances, such news has helped hike the prices of takeover targets but the weak market performances in the second half of August have largely reversed speculative gains seen earlier in the month.
Turning to natural resources, miners haven’t fared too well this month as fear of weakening demand should a double-dip recession take hold has seen investors step away from ‘riskier’ assets such as commodity producers. But this hasn’t prevented individual players from enjoying M&A fillips of their own. BHP Billiton this month launched a hostile bid at $39 billion to buy Canada’s PotashCorp, which is now reportedly in talks with potential white knights including BHP-rival Rio Tinto and a Chinese partner, according to press reports. Other deals to grab the headlines have included Vedanta Resources’ move to acquire a controlling stake in Cairn India from Cairn Energy; Dana Petroleum’s rejection of a bid from South Korea’s state-owned KNOC that came in almost 60% above the Scottish oil & gas firm’s share price prior to the announcement; and the return of speculation that Royal Dutch Shell is gearing up to take over gas explorer BG Group.
In the tech space, US-based firms have seen a flurry of activity with Intel making a move on McAfee and 3PAR eventually accepting a raised bid from Dell that was spurred by Hewlett-Packard trumping its original bid.
It appears that after years of tightening the purse strings, battening down the hatches and focusing on core activities, companies are finally starting to feel that it’s time to step back into the water and take advantage of attractive valuations. Morningstar equity analysts see the market as fairly valued in broad terms but the return of investors to the market in September is likely to be marred by ongoing uncertainty regarding the global economic recovery—uncertainty that looks set to linger for some time.
