Weekly View - Money never sleeps
One of the big themes we see playing out next year is a resurgence in M&A activity. Portents of this were evident last week, with the announcement of planned tie-ups between Slack and Salesforce, IHS Markit and S&P Global. With a brightening economic outlook and extremely low cost of funding, more deals can confidently be expected. Historically, deal count has been positively correlated with return on equity, which should rise as the recovery takes hold. In parallel with deals of a more offensive nature, we are also seeing traditional industries such as banking being pushed into defensive M&A. All of this makes us positive on event-driven hedge funds focused on corporate restructuring and corporate deals.
Covid is still wreaking havoc on the US economy, as illustrated by high-frequency indicators such as airline travel, car fuel demand and electricity production all down materially on last year. Small wonder that spending over the Thanksgiving season was disappointing, according to National Retail Federation figures, while nonfarm payroll data for November showed a big decline in job growth. Yet these developments look like adding a sense of urgency to talks in Congress over a renewed fiscal stimulus deal. Signs on that front have been looking more promising in recent days, contributing to a rise in inflation expectations. However, our base case remains that we will have to wait until early next year before a final agreement on the shape and size of a stimulus package.
There are signs that the Americans could continue to hang tough in relations with China after the end of the Trump presidency. Following the ban on US investments in Chinese firms linked to the military, Congress last week passed legislation that could force Chinese stocks that fail to comply with US accounting standards to delist from American exchanges. A U-turn on either of these measures under Joe Biden is unlikely in the short term. We are still positive on China, but this persistent friction is one reason why we are broadening our focus beyond China to Asia at large (and specific countries in other EM regions). Country selection is paramount.