Prevalence of takeovers and mergers is more apparent in markets

Standard Life and Aberdeen Asset Management have agreed terms on an £11 billion merger that will create Britain's biggest asset manager

WE'VE seen the market here and in the US hitting new highs recently, to the surprise of many. We are facing probably one of the most traumatic backgrounds in terms of political uncertainty – the two major issues being the vagaries of President Trump in the US and the unknown consequences of Brexit in the UK.

Volatility in the stock markets has been very low in contrast to last year, and the Vix measure of volatility is showing a level of roughly half its 20-year average and yet in a somewhat contradictory manner, confidence in the market is waning.

There is certainly a great deal happening in the financial world. Tomorrow sees the UK Budget, which isn't expected to unveil any significant changes in direction. The calls by the Opposition for an increase in public spending are largely likely to fall on deaf ears, for example, as Chancellor Phillip Hammond has already signalled his intention to continue with many of the pre-existing targets, particularly those related to reducing the long standing deficit.

There will, of course, be some sweeteners and the economic forecasts are likely to be upgraded, but we have already been told that there is no “pot of money” to be spent. Mr Hammond prefers to keep his powder dry until we have a clearer idea of the economic effects of leaving the EU.

In the face of all these outside influences, basic economic indicators are relatively favourable. The outlook for growth is looking up and so far consumers do not seem to be adversely affected in terms of spending. At risk of dashing cold water on this relatively benign scenario, there are some negatives emerging. Expectations for a rise in inflation are increasing and indeed we have seen the consumer price index creep upwards in recent months and it now stands at 1.8 per cent, close to the official target of 2 per cent.

The strength of sterling – a feature since the referendum in June – has had a mixed impact. On the one hand this has helped the stock market to reach unexpected heights as so many of the major companies have a significant proportion of dollar earnings. Longer term it will impact negatively on inflation as imported goods are more expensive and indeed many aspects of modern life are impacted - travel overseas being an obvious one.

One feature that is becoming more apparent in the market is the prevalence of takeovers and mergers. A couple of weeks ago there was an attempt by Kraft to bid for Unilever (swiftly rebuffed), but the price of UK companies is naturally more attractive now to US predators.

This week we have seen an announcement of the merger of Standard Life and Aberdeen, two UK financial stalwarts. An increase in M&A activity is sometimes an indication that we are nearing the top of the market, but with so many opposing forces, it is hard to say whether this is the case this time.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.

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