The founder of Seven Investment Management on money, Merkel and mooses
Good news: companies have been sitting on a lot of cash. Bad news: they haven’t been spending it.
Good news: there appears to be some movement in the number of mergers and acquisitions and possible stock market floats. Bad news: watch the prices you are going to be asked to pay.
But at least it is a change and the ‘log jam’ seems to be breaking. However, as the corporate atmosphere seems to be changing, we are seeing a flurry of deals now being promulgated and pushed through, with certain investment banking teams having to recruit again (including some of the old team they had previously got rid of!) as the proposed deals start piling up.
Is this then a sign of confidence? Well the answer must be partly yes, but possibly it is also a reaction to the thought that the era of cheap QE money will be coming to an end and that rising rates mean that deals must be locked in now to avoid extra costs. Already we have seen government debt yields rise and although central bankers will be loathe to take any precipitate action on interest rates which could scare the markets (as in 1936), the cost of money is starting to rise and an interest rate rise will be inevitable at some stage.
So from Verizon and Vodafone, to Nokia and Microsoft, and Publicis and Omnicom, the list of deals is growing longer. A key measure will be the amount of activity generated by the private equity operators as they use this market to sell on their older investments and take advantage of the cheaper money to invest in others. They quite often have to rely on the ability to move deals through the cycle (normally three years) to make their profit, but for the past five have suffered from trading blockage.
Whatever your view on the private equity providers, whether they are the dark knights or whiter ones, and there are both, the economy can benefit from better quality PE investment and it will suffer if it doesn’t function properly.
To this we can also add the flurry of floats that are likely to be coming our way. With Lloyds floating off its TSB brand next year, to the Government trying to sell off the family silver teaspoons, we should be prepared for a rise in the number of offerings coming our way. Now don’t get me wrong, this is a good sign of confidence, but equally investors should be suitably sceptical of those charmingly attractive investment offerings being purveyed.
Unlike many of the privatisations and demutualisations, which were ‘priced to go’ to make sure they were a success, many IPOs are priced to maximise the return for the sellers and their various ‘agents’. So as investors, we need to look through the hype to the underlying proposition to make sure it stands up.
Another key issue for me is where your investment money is going? Is it to help build a greater and more profitable business? In which case fine. Or are you in fact just paying out the last owners to go and buy their yacht? In which case no!
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The Merkel effect All eyes this week on the German elections to see what style of coalition we will get – soft pink or soft blue. Their constitution has been so designed to prevent one party gaining absolute control (some historical issues here), and so far the betting would appear to favour a centre left Merkel government.
Either way, what we want to see is a clear mandate (if that is possible in a coalition) to address not just the Euro zone issues but also the growing frustration within the broader EU membership about the structure and role of the Union in the future. The popular feeling seems to be moving towards a confederation of States forming the world’s largest trading block where common issues can be addressed rather than the previously Franco German view of an increasingly united states of Europe. This is going to be especially important as there are no really major elections on the continent before 2016, and thus Mrs. Merkel’s victory could set the direction for the next few years for the EU.
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Royal Mail Oh dear, another example of some lack of imagination. It’s not the privatisation I have a problem with – after all, this unfortunate has been raped and pillaged by governments since the end of the war. It has been starved of investment, milked for cash and left to be unable to effectively compete internationally.
In fact the old Royal Mail has been saved by the Internet. Online shopping has provided a huge boost of its profitable parcels business. I am surprised that Amazon hasn’t made a bid!
No, my issue is that here we go again with an old fashioned idea of privatisation – freeing the company say the politicians – or in my view just lumbering the company with thousands of shareholders and encouraging Sid back into one stock shopping again.
It would be cheaper, easier and far more effective to create (my apologies for mentioning this again) an investment fund holding all the rest of the family silver teaspoons, which could be sold off as a portfolio of stocks and investments to the public.
The government gets its money, the shareholders get a better investment portfolio, and the company is free of mass shareholding costs as well as the government. The Fund could then sell off the companies it holds as and when suitable and not according to political dogma, timing and dictum. A UK Sovereign Wealth Fund for us all to invest in and put into our ISAs for a longer term investment in UK plc. Anyway Sid’s application will probably get lost in the post.
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And finally… beware angry loose moose.
When students at the Risil secondary school in Vestby, southeast of Oslo, found broken glass on Monday morning, security cameras showed the perpetrator was not a delinquent teenager.
An angry moose, probably upset by its own reflection had in fact smashed through the glass doors of the Norwegian school at the weekend.
“The janitor looked through the surveillance tape, hoping to identify the thug who did this, but was shocked when he saw that the damage was done by a moose and her two calves,” said school principal Solveig Eid.
Eid believes the moose must have seen her own reflection in the glass door and charged towards it. A Norwegian moose can be as tall as two metres (6 ft) and weigh as much as 400 kg (880 lb)
First it was a broken window, and this is how it starts. Next time the delinquent Moose will probably turn up with a spray can as well.
Have a good week.
Justin Urquhart Stewart is the founder of Seven Investment Management and a regular media commentator. Originally trained as a lawyer, he has observed the retail market industry for 30 years whilst in corporate banking and stockbroking.
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