Brian Bollen's Blog

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Brian

EMEA M&A Outlook Remains Varied

The full-year 2011 edition of EMEA Deal Drivers, published by mergermarket in association with Merrill DataSite, provides an extensive review of M&A activity in the EMEA region, offering a detailed analysis of specific sectors and regions and identifying emerging trends in deal flow for the upcoming year.

Across the EMEA region, 2011 was split between an encouragingly busy first half followed by a slump in M&A activity triggered by the eurozone debt crisis and political upheavals. Year-on-year M&A activity is still up, however, with 10% more deals announced this year than last and aggregate deal value up 1%.

Key findings in the report include:

Fontemp Mandates SGSS

Societe Generale Securities Services in Italy reports that it has been appointed by Fontemp to provide it with depositary bank services.

Fontemp is the contractual pension fund for Italian temporary workers employed by temporary work agencies with fixed and unlimited contracts, whose function is to deliver complementary pension payments in addition to the compulsory welfare system.

SGSS says it was retained for its recognised expertise in this activity, in particular its rapid and efficient level of operational execution and its capacity to provide clients with solutions which will evolve to meet their developing needs.

 

Love is in the air...except when it comes to Greece, Europe, UK...

Bill Blain’s Morning Porridge – February 14 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: Bill.Blain@newedge.com

I love the story about the Goldman Sachs economist when asked if Europe had a future responded...“Sure, as an open-air museum!”

This morning markets opening in the red. Financials wider and European yields are higher. But, what did I miss yesterday? Apparently it was joy unconfined as Greece voted for austerity – markets up - then Germany warning them this time its serious – markets wobble. The likely next Greek prime-minister says 'yes Angela', while telling his electorate he will renegotiate the latest austerity promises when he wins in April.

But the hot air around Greece approving its latest austerity budget was put in context by Moody’s late last night. European sovereigns took a deserved shoeing from the agency: Spain and Italy to A3, France and Austria on negative watch. The UK’s AAA at risk.

The ratings agency stated the downright bleeding obvious: while Europe remains convulsed in this debt crisis, anaemic growth and austerity tarnish the region’s prospects. NSS! However, the timing of the downgrades conveyed a less subtle underlying message: Grand futile gestures like bailing out Greece again generate substantial costs, diminish credibility, and achieve limited gains.

Sierra IM In Strategic Income Move

California-headquartered Sierra Investment Management, a boutique investment adviser specialising for over 24 years in low volatility absolute return investing, has launched the Sierra Strategic Income Fund that will allocate tactically among a wide range of income-oriented asset classes.

Glencore, Xstrata Structure As Expected, But Ratio Still Low

By RBC Capital Markets

The XTA/GLEN proposed merger ratio of 2.8 GLEN shares for each XTA share via a scheme of arrangement was announced last week. We think the industrial logic for the merger is sound and the scale of the combined balance sheet should reduce lending costs and allow for further potential industry consolidation.

Glencore has done well in its negotiations with Xstrata; however, we think the 2.8 ratio is a lowball ratio. The only issue outstanding for us is whether it should be revised upward.

Current proposal could be voted down

With the ratio left to debate, all that really matters is who votes against the scheme. An effective blocking stake of 16.5% would be needed to change the current proposed ratio. We estimate that 47.1% of the XTA shareholder register holds only XTA shares (no GLEN holdings). It is just this group that needs to vote against the ratio.

Competition considerations not an issue, in our view

Given the size and fragmentation of the commodity markets in which both Xstrata and Glencore compete, we do not see many issues to be raised by the competition authorities. Even in the extreme scenario of combining XTA/GLEN market shares in the N. Atlantic thermal coal market, we see the new entity accounting for 27-34% under extreme assumptions, still below the 40% threshold. We do not see combined market shares as a deal breaker.

 

CDS Vs Repo Trade: Finadium Reports

A new report from US-based specialist research firm Finadium looks at the linkages, similarities and differences between Credit Default Swaps (CDS) and the repo trade.

CDSs have come under fire lately, not only from European regulators looking to reduce investor use of naked swaps but also from the unique attributes of CDS contracts that may leave investors in a "voluntary" Greek restructuring without the protection they thought was there, says Finadium.

As the allure of CDSs wears thin, some hedge funds and other investors are looking more closely at the repo trade. This report is recommended reading for market professionals who trade CDS or repo, corporate treasurers looking to hedge their exposures, and service providers looking to advise their clients on the best ways to achieve their investment objectives.

The report includes a model of haircuts and financing rates under multiple scenarios to identify the profitability of certain trading strategies today. For more information visit the Finadium website.

Looking For Advice On Avoiding UK Property Tax?

From international trust and foundation specialist Vistra, St Helier, Jersey

Last year The Daily Telegraph, citing research from Jones Lang La Salle, confidently predicted that buyers from Indonesia, Thailand, Taiwan and China would be the latest to target UK commercial and residential property deals and much of the evidence suggests they have been right.

The global financial crisis has certainly affected risk appetite, but safe havens such as London have continued to see an in-flow in prime property purchases by commercial and residential buyers from Asia, with a large percentage of buyers in the residential property market being made up of Asians who are attracted by the weak pound and rising rent opportunities.

Equity Dividends Could Add Stability: Allianz

Equity dividend strategies could enhance the stability of a portfolio during bouts of inflation or deflation, according to a new report, the latest in a series on dividend investing, by Allianz Global Investors. High and sustainable dividend yields proved an anchor of stability”in the past, the report says.

Dividend strategies in an environment of inflation and deflation is based on an analysis of the performance of equity dividend strategies during periods of inflation and deflation over recent decades in markets such as the United States and Japan.

The key findings of the report are:

Shares with sustainably high dividend yields could bring stability to a portfolio amid inflation or deflation.

High dividend payout ratios may be accompanied by above-average rather than below-average future earnings growth.

UK Attracts Overseas M&A Interest: Experian

This month's issue of Experian's Business Research Monthly Review takes as a starting point overseas interest in investing in the UK even as the volume of mergers and acquisitions continues to fall. But let Experian do the talking.

UK M&A and ECM Analysis – As we turn the corner into 2012, the M&A market continues its downward trend in volumes from summer 2011, falling by 2.45% on the month, but rebounds in terms of values that are almost double the figure in January 2011, at £15.6bn. Most of this, however, was driven by overseas companies, particularly non-Western ones, acquiring British firms; indeed of the top ten deals, nine were carried out by overseas concerns.

PIMCO's Western Medicine

PIMCO’s latest Equity Focus by Neel Kashkari goes by the title Western Medicine. Highlights include:

·         Consumption fuelled by temporary stimulative policies or reduced savings doesn’t move us closer to actually healing the US economy. 

·         Liquidity is buying time for European countries, but their economies are growing too slowly to support their debt loads. In the US, household debt is declining, but remains high.

·         Just as there is no reason to assume US household debt levels will continue to climb, there is also no reason to assume companies that benefitted from that debt-fuelled spending will grow at historical rates.

·         Until we see sustainable, real economic growth in America, we believe equity investors should carefully scrutinise the assumptions underlying consumer discretionary stocks and consider global companies that are selling into higher growth markets.

Download PIMCO Equity_Focus_Western_Medicine_Global_EF006

BofE £50bn QE Maybe Not Enough: Schroders

Azad Zangana, European Economist at Schroders comments on the Bank of England's new £50bn QE plans, which he believes might not be enough to avoid a double dip recession

“The Bank of England decided to keep the UK’s base interest rate at the record low of 0.5% today, but also decided to expand its asset purchasing programme, also known as quantitative easing (QE), by an additional £50bn.

“This will take the total purchases of gilts to £325bn by the end of April. The increase in the Bank of England’s QE programme is worth just over 3% of current nominal GDP. During normal times, when the banking system is functioning correctly, this would be hugely positive for growth. However, as banks are being asked to deleverage, we doubt that this cash injection will prompt extra lending to the real economy.

“The Bank of England released a statement along with the decision announcement, highlighting the downside risks to growth and inflation over the medium term. The statement also mentioned the slowdown in exports heading to Europe, indirectly caused by the eurozone debt crisis.

“The UK economy remains desperately fragile, and with the outlook in Europe remaining gloomy, the latest increase in QE from the Bank of England is unlikely to reduce the risk of a double-dip recession in the near term. We expect the Bank to announce more QE once this latest round ends.”

 

Citi Names Ghobadian EMEA Collateral Champ

Citi today announced that Saiid Ghobadian has been appointed EMEA Head of OpenCollateral, Citi's collateral management product solutions. The increased regulatory pressure coupled with the growth of the OTC derivatives market has resulted in an increased focus on collateral management and Ghobadian's appointment strengthens Citi's capabilities in this sector, says Citi. 

Cool Hand Luke Looks To The Future

Luke Stellini, European/Global product director at Invesco Perpetual, provides his latest outlook for Europe Equities

Equities remain very attractive in more cyclical and less economically sensitive areas

Low growth environment going forward as deleveraging continues to set the agenda

Dividend income comes to the fore as a likely major source of total return

“Waitangi Day is a public holiday in New Zealand to commemorate the signing of the Treaty of Waitangi on February 6 1840. The only reason I know about this day is because on the nearest weekend to this date, the tens of thousands of kiwis living in London dress themselves up in a variety of bizarre costumes and launch into a ‘pub crawl’ using the Circle Line on London Underground as their guide. Irritating as it may be to have to dodge a rugby ball or a swaying New Zealander, there is an unmistakeably jovial and upbeat air to proceedings. This short-term burst of happiness in a backdrop of freezing temperatures and mid-winter gloom, brought me back to the start of the year for stock markets. In amongst the spectre of austerity, default fears and all the rest, we have gone on our own metaphorical pub crawl over the last month, as risk assets have led the way upward for markets everywhere. To extend the analogy to its predictable conclusion, the key question is will markets, like the hordes of New Zealanders, wake up the next day with a splitting headache and patchy memories, or will they be able to extend their party further?

No Escape From Sovereign Debt Trap: Standard Life

Standard Life Investments says it believes that few countries have the ability and policy responses to escape the approaching sovereign debt trap. Many OECD governments are suffering from the highest levels of national debt in a generation.

This reflects the slow economic recovery in recent years, affecting both taxation and spending trajectories, on top of any bank bad debts stemming from the Global Financial Crisis. The end result will be a sovereign debt trap, a state of affairs where the major debtor nations’ debt is unsustainable given current bond yields, their fiscal stance and growth outlook.

RWC’s Ajay Gambhir Sets Positive Tone

RWC’s Ajay Gambhir sets a positive tone for long/short investing in 2012, against a tough macro backdrop

Speaking to investors this week, Ajay Gambhir, manager of RWC’s £190m RWC Europe Absolute Alpha Fund, outlined to investors why despite a range bound outlook for equities in 2012, the environment for stock picking is compelling.

Firstly, valuation dispersion between sectors is at multi-year highs. Sector performance will drive portfolio returns more so than market beta or the cyclical/defensive tilt of a portfolio (that drove returns in 2011).  Gambhir explains: “We do not have a strong view on market direction in 2012, although we do believe that the potential exists for sectors to drive performance through a convergence of valuations. We think the sector shifts will be strong enough to be independent of market direction. By way of example, food stocks are on 16 times P/Es and telcos on nine times P/Es, both are arguably defensive sectors, but rated very differently. Meanwhile, autos are on 8 times P/Es and industrials are on 13 times P/Es, so there is a lot of scope for re-rating and de-rating. These are clear long/short opportunities to my mind.”

Gambhir also sees improving stock picking opportunities over the next 12 to 18 months.

ING IM Liquid Euro Fund reaches €6bn AUM

ING Investment Management Europe reports that its flagship AAA-rated short-term money market fund has reached €6bn in assets under management (AUM).

Standing at just over €4.7bn by the end of 2011, the fund was bolstered by significant net inflows from corporate clients in Belgium, France and the Netherlands at the back end of last year, it goes on to say. The fund has nearly doubled in size since the end of 2010 when total assets under management stood at €3.662bn.

On your left and on your right…Let The Dance Begin...

Bill Blain’s Morning Porridge – February 9 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: Bill.Blain@newedge.com

More of the same today. The Greeks dancing on the edge of the volcano having agreed about 90% of the necessary cuts (pensions remain a problem). The Troika is likely to demand more – so let's see what comes out of the Brussels meeting tonight. The euro has been bouncing on news like the ECB may deign to join the jig.

From the sidelines...is anyone else still bothered? If it happens...It happens. If it doesn't...Well what difference can it make? Ambrose in the Torygraph points out Greek VAT receipts have collapsed by 18.7% year-on-year due to collapsing small businesses. Overall tax is down 7%. What hope GDP remains south of 120% even after a haircut and second bailout? Support for hard-left parties is soaring, and they are holding elections in April. Go figure.

Greece is just a symptom. It’s not the disease. I've got two themes for today. The short-term outlook for markets, and the long-term implications of what’s going on. Unfortunately, they are all about politics, and the thing we hate most is trying to trade politics.

Moody's: Global Corporate Default Rate Opens 2012 at 2.0%

From New York Moody's reports that its trailing 12-month global speculative-grade default rate came in at 2.0% in January, up from December 2011's revised 1.8% level.

In the US, the speculative-grade default rate ended January at 2.2%, up from December's 1.8% level, while in Europe the default rate ended January at 3.0%, unchanged from December's revised level. The December rate was revised to include the default of Irish Life & Permanent plc.

This time last year, the US rate was 3.0% and the European rate was 2.3%. Moody's says it expects the global speculative-grade default rate to rise to 2.7% by January 2013, well below the 5% historical average.

"Default rates remain low by historic standards, but they are increasing, particularly in Europe," notes Albert Metz, managing director of credit policy research. "We expect more defaults in the coming months. But our baseline case remains that default rates will remain below their long-term average."

Moody's 'January Default Report' is now available, as are Moody's other default research reports, in the Ratings Analytics section of Moodys.com.

 

What's In Store: Ashmore

Ashmore Investment Management's Jerome Booth, head of research, and Jan Dehn, strategist, look ahead to what is likely to happen over the next few months

Big Picture

The world in 2012 will continue to be divided into deleveraging G10 economies and EM economies without excessive debt. The US and Europe will continue to experience sub-trend growth, with the main risk still a return to recession or even depression.

Most of the EM economies will grow close to trend, with the main risks being country specific, most commonly inflation. G10 and EM economies will continue to experience broadly synchronised intra-year inventory cycles due to the increasingly globalised nature of the manufacturing supply chain, but the underlying growth stories and the demand side conditions in particular will continue to differ markedly for the next 12 months and beyond in favour of EM. Indeed, EM fundamentals are likely to be even stronger relative to G10 than last year.

We believe it most likely that global monetary conditions will be eased further in G10 economies via fresh rounds of QE, which will tend to keep asset prices elevated and interest rates low. 2012 will therefore be another year with QE-inflated asset prices co-existing alongside weak underlying G10 fundamentals to produce higher than normal levels of asset price volatility.

Volatility is not risk.

Austerity without growth doesn’t work: AllianzGI’s Neil Dwane

In a regular call to clients, Neil Dwane, CIO Europe, at Allianz Global Investors/RCM, made the following comments on European economic prospects.

“In Europe, we see clear evidence of an economic slowdown as austerity whether self-imposed by the UK, or EU-imposed on Greece, Italy and elsewhere, takes hold. Indeed, it is beginning to look like a recession or certainly a significant slowdown. French new car sales are down 21% and we have seen German retail sales down 1.4% in December. These are not the sort of numbers that Europe wants to see because we need the stronger countries continuing to spend so that they can create demand for the weaker countries to meet.

“We are on the seventeenth European summit so far and it all looks rather déjà vu. Mrs Merkel has left Brussels with an agreed and more enforceable austerity pact, however, the debate has moved on because we now know that austerity without growth doesn’t work. The question is how to find growth. We still have highly leveraged sovereigns that need to find more money upfront to get the growth going to improve the efficiency and competitiveness of their economies.