Was that it? Along with other world markets, the FTSE 100 has recovered rapidly from its 7% slide in early March. Goldman Sachs and HSBC expect it to climb beyond 6,830 by the end of the year, not far short of 1999’s record high of 6,950. You can see why that could happen, says Tom Stevenson in The Daily Telegraph. The market has gone “bid-crazy. Takeovers – rumoured, actual and just plain made-up – dominate the financial headlines”. Scottish & Newcastle jumped by 15% a fortnight ago on rumours of a possible takeover.
Private equity’s access to cheap credit is a key driver of the mergers and acquisitions (M&A) boom, while the market is also drawing support from strong corporate balance sheets, which are facilitating share buybacks, special dividends and healthy dividend increases, as Chris Brown-Humes points out in the FT. “But then there are a number of negatives,” he says. The key worry is the weakening US economy as the housing bubble deflates. With a recession in the US now looking more likely, “any piece of bad news can cause jitters”, says FT Deutschland.
The US economy is weakening just as earnings momentum is slowing. S&P 500 profits are expected to rise by just 3.6% in the first quarter – down from an estimate of 8.7% in January – thus breaking a 14-quarter streak of double-digit year-on-year increases. Low interest rates and robust corporate profit growth have been “the twin pillars supporting the bull market”, says Jacqueline Doherty in Barron’s. “One of them has just developed fissures.”
Albert Edwards of Dresdner Kleinwort points out in the FT that the “alarming” slide in US profit growth is a threat to the “late cycle M&A party”. Meanwhile, FTSE 100 profits are expected to rise by just 5.6% this year, “barely faster than the retail price index is growing”, says Stevenson. Beyond the earnings slowdown, geopolitical risks and a rising oil price are further concerns for markets. Indeed, “prominent fund managers” are worried, as Matthew Richards notes in the FT.
Neil Woodford of Invesco Perpetual is warning of “more intense economic headwinds” this year, with US and UK growth slowing, while Ken Murray of Blue Planet Investment Management has reduced his equity exposure, fearing a 20% global market slide prompted by a US recession. Given the list of worries offsetting the boost from M&A, no wonder they’re expecting more turbulence.