Hong Kong Stock Exchange

Cash-rich Asian companies will drive equities higher in 2013, says Managing Partners

Cash-rich Asian companies will be among those corporations with healthy balance sheets driving global stock markets higher through acquisitions in 2013, according to Managing Partners Limited, the boutique fund management company.

On an historical basis, M&A activity is extremely cheap to finance because interest rates are so low, says Jeremy Leach, managing director of MPL.

“In the 1990s the cost of debt was 10 per cent-plus but it can be done for a fraction of that now, so it is cheaper to raise money with debt rather than raise equity. It is far better issuing some sort of convertible debt and allowing conversion when the share price has gone up.
 
“Leading Asian businesses are also likely to lead the way with acquisitions in Europe because they are so cash-rich and Europe is so cheap. We could quite easily see a situation where one of the leading bank brands in Europe is acquired by an Asian bank because it has the purse strings to do it.”
 
In the first three months of 2012, national oil companies (NOCs) were involved as buyers in 25 oil and gas transactions with a combined value of USD12.4bn. The most active deal-makers in the first quarter of 2012 were NOCs from Asia and Russia. Recent years have witnessed the Asian NOCs’ international pursuit of production and reserves to meet aggressive supply targets. Most deals announced by Russian NOCs focused on the acquisition of stakes in independent domestic oil and gas companies or regional partnerships to help develop domestic oil and gas reserves
 
Global sourcing and distribution multinational Li & Fung Limited has said it will accelerate its acquisitions in 2013 on the back of continued strong profits. At a recent conference in Hong Kong, William Fung, chairman of Li & Fung, said: “As the company’s organic growth is virtually zero due to the sluggish market demand in the European and US market, we have to make more acquisition in order to push up the core operating profit performance. Amid the current global economic slowdown, we can find more attractive acquisition targets by paying much cheaper prices. Those European and Asian region focused companies and those health & beauty product providers will be our main priorities for acquisitions.”
 
SABIC, the Saudi Basic Industries Corp., which acquired US' GE Plastics for USD11.6bn five years ago, has indicated that it now has appetite to making further significant acquisitions in a bid to become the largest chemicals producer in the world. SABIC is fairly typical of large Middle Eastern companies that see the need to expand outside the Middle East because the continued impact of the Arab Spring has destabilised the growth of Arab markets and is likely to do so for some time to come
 
With the discounted value of many UK and European banks, many are prime for acquisitions by the Asian heavyweights and the timing would appear to be ideal as conservative lending margins (typically four per cent above base) have never been more profitable for banks than they are today. Their only restriction is capitalisation, which many wealthy Asian banks could easily deliver to the ailing balance sheets of UK and European lenders
 
Leach says a wall of cash is waiting to enter the equities market: “The longer the recession goes on for the longer the more dramatic the bounce will be. When it happens we will see a period of sustained recovery that produces better financial results, more trade of equities and more M&As.”

However, Leach does believe Europe will continue to struggle: “Europe has a long journey ahead of it. Austerity can work in a country such as Spain, which has its own economy but Greece has a fabricated economy, with most people working for a government that has no money. It just isn’t feasible that Greece will ever be able to repay its debts.
 
“There is considerable debate now across Europe and not just in the UK about the amounts that have to be contributed to the EU. We are still likely to see at least one exit from the EU. It is inevitable that Greece will leave but we might also see a significant contributor to the budget depart, which will have long term consequences for the union.”
 
Leach believes that while there will clearly be a number of corporate casualties resulting from Greece’s departure and some banks will see major corrections in their balance sheets; in general there will be more relief that the inevitable point has been reached.

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