Equities find positive territory
Most G20 bourses closed up in positive territory at the end of Q3. The FTSE 100 went up 21 percent. Between July and September 2009 it rose a number of times, particularly during August when it was reported to have climbed by 8.4 percent over the course of the year, having rallied by 39 percent since its low at the beginning of March 2009.
The positivity in the market was created by renewed confidence, rising consumer demand in China and India, and the economic stimulus packages. FTSE’s revived vigour has particularly focused on large capital stocks and stimulated by an increase in the crude oil price to around $73 per barrel.
During August the FTSE rallied over a four day period, a positivity that continued in September, boosted by higher commodity prices. Both summer months saw the index rising to new highs. It traded above 4,800 for the first time in August since early October 2008, and by September it had risen to 5,163.95.
In Q3 European shares climbed by 17.3 percent, the best quarterly gains in a decade. The trend appears to have been similar in the US, and in many of the other G20 countries.
Mergers and acquisitions more significant at end of period
Mergers and acquisition were more significant at quarter end. In September 2009 it was reported that T-Mobile and Orange (£8.2bn) were engaging in talks to merge their mobile phone network operations in the UK. Approval of this potential deal by the Monopolies and Mergers Commission would create the country’s largest mobile network, gaining a hold of a third of the market.
The prospect of this merger and others involving, for example, Disney and Marvel Entertainment ($4bn) and even Kraft’s rejected merger proposal of Cadbury worth £11.8bn, created hope for a rival in the fortunes of this market. An upturn would be stimulated by the fact that UK companies are valued cheaper than many of their global sector peers.
Nevertheless the Bank of England reported an ongoing decline in mergers and acquisitions in the UK, but the commercial real estate sector made a positive contribution to corporate credit demand over the Q3 period. Mergers and acquisitions and inventory finance are expected to contribute to increased credit demand over the next three months.
Buy-outs fall in value by 24 percent
The lowest number of buy-outs since 1995 at 384, down from 705 in 2008. Deal values are as low as $39.9m. The UK decline has been matched in continental Europe. Macroeconomic factors are cited in both cases.
The Centre for Management Buy-out Research has reported that their overall value tumbled by 24 percent during the first of half of 2009, compared to the same period in 2008. European buy-outs are now valued at just $15.3bn, less than 25 percent than the $63.1bn value achieved H108. This means that the heady days of 2007 are now a distant memory; the market was then worth $149.6bn.
Deals worth more than $15m have fallen by 75 percent. The market has been dominated by deals that are valued below this level. The short supply of debt is having a dramatic impact on this market. It will remain quiet until conditions in the leverage finance market improve.
Insolvency risk increases firms ask for time to pay their taxes
The recession has led to 204,000 firms agreeing “time to pay” arrangements with HMRC largely due to deferred taxes. The delayed payments are worth £3.6bn. This facility involves VAT, national insurance contributions corporation tax and other levies on firms. It was offered in a pre-Budget report to offer some relief to recession-hit firms.
Experts are apparently dumbstruck by the number of deals being made, leading to some payments being pushed back by several years and even though payments tend to usually last just months. Insolvencies are expected to spike when these arrangements end. Many firms will struggle to complete their final payments on time. Around 33,000 firms have already stepped into a situation where they have had to ask for repeat deals.
More economic pain is therefore expected, showing that the economy is not out of the woods yet. Nevertheless, since the scheme was announced in November 2008, £2.49bn has already been repaid to HMRC. Thankfully it is taking a more lenient stance than usual on business debt. Viable companies can avoid insolvencies by contacting them to make the necessary arrangement to pay the levies are a longer term period.
Quantitative easing weakens Sterling
Sterling has weakened due to extended quantitative easing (QE) programme. The British government has authorised the Bank of England to buy £175bn in securities using newly-created money. Opposition leader, David Cameron, has warned that this action could lead to a rise in inflation. His comments themselves were criticised as being wildly dangerous.
In spite of this heated exchange, interest rates remain at a historic low of 0.5 percent for the seventh month in succession, and quantitative easing is accredited for improving money supply, reduced bond yields and many believe it will improve the UK’s prospects for kick-starting the countryís economic recovery. Meanwhile, ten-year government bonds yielded 3.35 percent recently. They stood at 3.64 percent on March 4, the day before QE started.
The IMF has forecast that the British economy will slump by 4.4 percent this, but it is expected to expand by 0.9 percent in 2010 in spite of Bank of England warnings of high UK debt levels inter alia. Things don’t look much better across the Atlantic as the US dollar continues to slide, threatening its reserve currency status.
Regulation to create a financial market culture change
G20 governments have taken steps to implement the new regulatory agreement, which was agreed at the Pittsburgh Summit in the US. These steps include regulations for credit-default swaps (CDSs) which are to go through a central clearing house, in order to reduce systemic risk when counterparties fail. If possible they should also be traded on exchanges.
A bonus accord has also been signed to ensure that they donít encourage the kind of reckless behaviour that led to the credit crunch. The G20 hope that the new framework with not only prevent the extent of the current economic crisis from ever occurring in the future, but they also want to instil a culture of greater integrity and responsibility in the financial markets. It is hoped that this will prevent the excessive and foolhardy risk-taking that led to the financial crisis, which in turn led to the global economic collapse.
The G20 meeting gives way to a stronger position for countries like Brazil, Russia, India, and China (BRICs) and the Financial Stability Board. It is predicted that by 2050 these countries will be the world’s strongest and wealthiest economies.
Brazilian oil and gas to yield 2bn barrels
On September 9, BG Group Guara and its partners, Petrobas and Repsol, announced that they had discovered oil off the south-eastern side of the Brazilian Coast in the waters of the Santos Basis. The well has a potential yield of 2bn barrels per day. The Abare Oeste well is the fourth to be drilled in BM-S-9, proving the existence of hydrocarbons in the area.
Petrobas has a 45 percent stake in the business, BG Group owns 30 percent and the remaining 24 percent share is own by Repsol. They plan to produce an assessment plan of the oil and gas field, and they will seek its approval by the National Petroleum Agency.
The region’s leading oil producer, Mexico, isn’t having as much luck as its Brazilian counterpart. In December 2008 its oil production totalled 2.72 mm bpdm but it fell to 600,000 bpd. Brazil is therefore the new shining star, taking the spotlight from Mexico and Venezuela, and attracting massive investments and rising output.
Central banking: G20 exit strategy talks continue
The G20 Summit in Pittsburgh, USA, raised a new issue. Having created a number of interventions to prevent a global economic meltdown, the governments need to find a way to create exit strategies that wonít lead to their achievements from being undone in an instant, and once again creating an economic disaster and undermining recovery of the global economy.
Some policy makers commented in September 2009 that it was premature to begin talking about exit strategies, believing that the recovery is too fragile to contemplate an end to central bank interventions. It was however welcomed that the G20 central banks are prepared to engage in exit strategies as this will help to maintain market expectations.
The US Federal Bank announced that it will turn off the tap of new money in March 2010, but there was no indication about how it would mop it up later on. The Fed can take comfort from the fact that neither the Bank of Japan or the Bank of England have been shy of quantitative easing, while the ECB has been slightly more constrained. Because everyone is running a loose ship, the effects on exchange rates are reduced.
More recently, the renewed confidence in the market has led to the Reserve Bank of Australia raising its interest rates to 3.25 percent to avert inflationary pressures.