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SOCGEN: BUY EQUITIES OVER CREDIT DURING AN M&A CYCLE

20 May 2011 by Cullen Roche 4 Comments

Societe Generale says equities look favorable compared to credit.  They see the M&A cycle as playing a key role in potential future outperformance:

M&A cycle very strong start in 2011.
Definitive signs of accelerating.
Europe lagging take-off occurring in the US.

Support at the macro level:

- historically low real interest rates
- vanishing fears of double–dip recession
- attractive stock prices

Support at the micro level:

- corporate deleveraging
- strong cash positions
- productivity gains in the wake of the global financial crisis

Equities tend to outperform credit when the M&A cycle gets stronger.

Switch progressively asset allocation in favour of equities.
- Early stages of M&A cycles: rather neutral for credit as they take place under conservative funding structures. The use of cash for completing acquisitions is currently at record levels.
- Later stages: credit quality usually deteriorates as result of more aggressive funding structures. If cycle gathers momentum as we expect, our preference for equities will be more pronounced.

Source: Societe Generale

Cullen Roche

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Comments
  • EWcub

    “vanishing fears of double–dip recession”

    many thanks for this morning kind of humor hahaha … :)

    http://market-ticker.org/akcs-www?post=186468

    05/20/2011 at 3:28 AM
    • InvestorX

      Haha, a well spotted.

      And who says this M&A activity is not only a blip? Or it reaches a lower high? The last time it did not reach its previous peak. Why should it now?

      Very strange thinking by the guys. Do the have some model to back their expectation of a M&A boom coming? Why are stock prices attractive now after a 100% rise?

      A bit lame this piece, but to be honest I have not seen much sounder ones on M&A.

      05/20/2011 at 4:45 AM
  • chris

    interesting to see data to support my suspicion.

    have been on wall street for awhile, and i think the rise in M&A activity, together with some ipo froth, will serve to animalize spirits and draw some money from fear-induced zero return (negative real) investments.

    don’t see the ipo froth creating another nasdaq bubble as there are not alot of facebook look-alikes out there. yes, you will see groupon and zygna and any other network that can claim 100M members, but it won’t be another pets.com phenomenon.

    if price of oi behaves and US$ continues to appreciate vs euro, this point in time will be seen as a very nice (albeit contrarian) entry point

    05/20/2011 at 12:21 PM
  • quark

    The fox is calling in the chickens for dinner.

    05/20/2011 at 4:39 PM