Four Reasons For Buying Into Better Growth This Year

Brian Selzer

OCEAN CITY — One of our themes for 2014 is increasing business confidence built off a stronger global economy that results in companies reducing their cash piles. In the first few months of 2014, a surge in merger and acquisition (M&A) activity is one reflection of this trend. After a pick-up in 2010, M&A deal volumes have failed to accelerate despite more positive projections, including our own.

We expect 2014 to be a stronger year, however, because many of the headwinds that have held back deals for the last three years are diminishing. We believe the industries that should benefit the most from this upswing can be found within technology, industrials and financials as well as the more defensive healthcare sector.

Large U.S. companies are generally awash with cash, reflecting the inclination of corporate executives in recent years to manage their businesses for economic disappointment, political uncertainty and changing regulations. We believe this mindset is changing, with companies now deploying their cash piles in numerous ways. We have highlighted expectations of growth in capital spending and more recently we discussed a growing emphasis on returning cash to investors in the form of dividends or share buybacks. We believe that this year M&A is likely to become a third means of deploying corporate funds to grow earnings. There are four reasons why M&A activity is likely to rise in 2014. First, U.S. economic growth is expected to be higher in 2014. Household and business spending look set to grow more quickly and the fiscal drag is likely to be diminished. The mean consensus estimate for growth of U.S. gross domestic product (GDP) in 2014 is 2.7%, which would be a significant jump from last year’s 1.9%. Historically, improving U.S. economic growth has coincided with a rising number of M&A deals.

Second, equity markets have recovered to historic highs and there has been a strong relationship between higher equity markets and greater M&A activity.

Third, political uncertainty has diminished. We believe the fiscal and regulatory uncertainties that have dominated Washington over the last three years have weighed on corporate activity. This year should bring a turn as budget battles have passed relatively smoothly and threats of other conflicts have receded.

Fourth, investors no longer want cash returned to them to the same degree as in recent years. BofAML Global Research’s latest Global Fund Manager Survey found a declining number of investors wanting cash returned to shareholders, with more of them looking for increased investment.

Perhaps the most important impetus behind growth in M&A activity this year is the way the market has been rewarding deals. BofAML Global Research found that in the U.S. in 2013, shares of companies that were acquired returned well above the index. Surprisingly, shares of the acquirers also outperformed the market, a less common occurrence. We believe investors are rewarding companies seeking to grow earnings — even inorganically — whereas in the past they often saw deals as value destroyers for the acquirer.

(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)

Recent Fed Meeting’s Outcome Offers Mixed Results

OCEAN CITY — Economic and policy developments in the world’s largest two economies have been center stage. In the U.S., it was hoped the recent meeting of the Federal Open Market Committee (FOMC) would provide clarity on the Fed’s policy views. Unfortunately, this was not the case. Further east, Chinese economic data for the first few months of 2014 has … Continue reading

Hold Off Reactions To Poor Start

OCEAN CITY — Since the start of 2013, our advice has been for clients to consider broadening their exposure to developed market equities beyond the U.S., with Japan being a favored region. Japanese equities have fallen approximately 5% year-to-date in U.S. dollar terms, among the worst performance within developed markets. Despite this poor start, we remain positive on the region. … Continue reading

Odds Against Current Downtown Continues For Long

OCEAN CITY — In our Jan. 17 Weekly Letter (Making Sense of the Employment Report) we focused on the December U.S. payroll  data indicating a weaker pace of job creation than expected. Since then, additional economic indicators have heightened concerns about a slowdown. The January payroll report was disappointing as well. Measures for industrial production and manufacturing, retail sales and … Continue reading

Equities: A Recent Pullback, Not A Change In Trend

OCEAN CITY — In our December Monthly Letter (Improving Growth, Low Inflation and Favorable Markets), we expected higher market volatility in 2014 driven by the reduction in monthly bond purchases by the Federal Reserve (Fed). What we had not expected was 38 days into the year, equity markets would have been hit by a range of Emerging Markets events, including … Continue reading

New Expectations For A New Year

OCEAN CITY — With interest rates at historic lows, resulting in lower income from bonds, achieving investment goals has brought about a shift in portfolios that has tilted them toward equities. This raises the importance of understanding the drivers of equity returns over the near term. Three components drive total returns of equities: dividends, earnings growth and valuation changes (for … Continue reading

2014 Financial Resolutions To Consider

OCEAN CITY — For the average equity investor, 2013 was certainly a year to celebrate. As financial markets and the global economy continue to normalize, we outline some key investor resolutions for 2014. Resolution #1: Pay attention to the economy and the Federal Reserve. The macroeconomic backdrop has been a critical determinant of asset performance in recent years. We think … Continue reading