The risk rally has got a new lease of life, confounding the correction brigade and taking the Dow Jones to a new 2009 high, because there is apparently no end to G20 government stimulus and because the corporates have now joined the party.
There are now three big hostile bids underway: Kraft for Cadbury, AMP for AXA and Canadian pension funds for Transurban. BHP’s enforced 12 month wait between bids for Rio ends in 17 days.
Meanwhile the Australian dollar has touched US93c again overnight as the greenback hits the skids, US bond yields are falling, on demand from Japan this time and less so from China, and equities everywhere are rallying hard.
The fact that US bond yields are falling with the US dollar suggests that we are still seeing a straightforward risk asset bid, not the long-awaited (by many) run on the US dollar over sovereign debt concerns, even though America’s fiscal position is plainly unsustainable.
And this despite 10.2% unemployment, with the wider U6 jobless measure rising to 17.5%. This is going to keep pressure on wages growth, spending and loan defaults, restrain Government tax receipts and keep the cash rate near zero for “an extended period”, to quote Ben Bernanke.
So the rally in global risk assets based on cheap US dollar funding has resumed with a vengeance. But what’s changed lately, apart from a bit more certainty that US dollar debt is only getting cheaper? The big corporate players are joining in.
So far the bids are cautious and cut-price, which is why they are hostile. We are not back to 2005-07 with the warm embrace by target companies of over-priced leveraged private equity deals.
Debt remains in short supply: what we are seeing now is a new boom of largely equity-funded takeovers by chief executives who are mindful of their earnings per share. Any adventure that reduces eps and return on equity in this environment will be punished severely.
AMP and AXA SA waited until AXA Asia Pacific’s share price had rallied 40% before launching an idea that has been obvious since the French parent’s first bid failed five years ago.
That bid in September 2004 was priced at $3.75 a share when AXA had been trading at around $3.40. Why not come back with the same price when the stock was $3 again in March 2009? Because the world had changed then.
Now the world has changed back again and $5.34 is too cheap. AMP and AXA SA will undoubtedly bid more and win the prize: AMP will create a financial planning megaforce of 4,000 to deal with the commission revolution that will hit next year, and AXA SA chief Henri de Castries will no longer have to ask the Australians for permission to expand in Asia (he had promised the Australian government in 1999 that AXA Asia Pacific would have first right of refusal on Asian opportunities for the group).
Kraft has lobbed in a hostile bid for Cadbury on the same terms as the indicative bid that had been rejected two months ago, even though the exchange rate movement has reduced it from 745p to 717p per share.
The Cadbury board is holding out for 800p and Kraft, which is clearly playing a long game here, may have to pay that. But for the moment, Kraft CEO Irene Rosenfeld is working hard to get Cadbury cheaply.
Transurban is not so much a corporate play but a test for Australia’s super funds. If they take the cash from their Canadian counterparts, what do they do with it? Yes it improves their second quarter performance numbers, but there aren’t many better long time pension fund assets than Transurban.
Then again, they probably also realise that the resumption of the rally just means the next reckoning, when it eventually arrives, will probably be harder and deeper than it was going to be, so getting some cash off the table with the ASX 200 at 4700 might seem like a good idea.
This article first appeared on Business Spectator.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
