The Barbarians Can’t Wait!

So, another “absolute, last-gasp” deadline of the current Greek crisis has passed, yet markets seem relatively unperturbed. Which is because, as we know, the real last gasps won’t come until the very end of the month. Probably literally to the last seconds. We might even get a fright as it slips into July, but as long as everyone can agree before European markets open for business next Wednesday, then the powers that be will ensure that there wasn’t a default at all, and the can will be grubber-kicked at little further down the road.

And that is the cheery version of events.

It is possible (but not probable) that all involved will face up to reality. Over the last five years, the Greeks have been committed to retrenchment, but not reform, and as a result are still no-where near being in a position to stand on their own two feet. Equally, the notion that its government paper is somehow worth its nominal value is delusional. Greece will default on its debts; the only real debate is when.

But with a little less than a week still to run of the current Act in this tragedy, there is little commentary that can be offered without running the risk of looking like an idiot in a very short space of time as events unfold. As my colleagues will attest, I certainly don’t need any more opportunities to show myself up as an eejit.

Perhaps, though, we might legitimately discuss why the stock market does not seem to be particularly worried about what the world might look like in a week’s time. Yes, share prices are off a little month to date, but not to the extent that suggests any kind of building hysteria. It is possible to put this all down to “the Madness of Crowds”, and individuals take comfort from the cyclical confidence gained from assuming that everyone else must know what they are doing. If that is the case, then it is worth remembering Charles Mackay’s words in his book (from which I have cribbed part of the title) “Extraordinary Popular Delusions and the Madness of Crowds”.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

This herd instinct may well be making us all delusional. However, we could propose a counter argument to this view that we are all lemmings about to fall off the edge of a cliff.

One growing feature of equity market performance this year has been a substantial increase in the level of takeovers and mergers proposed to, and by, UK quoted businesses. At long last, executive management teams in companies across the developed world seem to be becoming much more active with the substantial financial firepower that we have known they have had for more than half of the last decade. More than at any time in the last five years, companies are deploying cash to bulk up operations and take advantage of investment opportunities in the quoted arena.

Legitimately, one may ask why corporate buyers of assets are any more sensible about valuation and profit growth than anyone else? Is this just yet another instance of an asset price bubble in the bond market squeezing its way into other asset classes? Potentially yes, but our experience tells us that as a herd, corporate managers are less prone to dive into rash behaviour, whilst we would concede that individually we have seen some monumentally stupid purchases of business in our time.

When a glut of M&A activity has been a clarion call to run away in the past, it has tended to come from excess capital flooding the equity market. The two best examples of recent times was the deal-frenzy that accompanied the end of the tech boom (Vodafone/Mannesmann or Time Warner/AOL anyone?), or the surge of private equity investment that created a public to private boom just before the wheels came off the global financial system in 2007/8.

Other periods of significant activity, such as the raft of UK capital goods businesses bought by overseas companies in the early 1990s, or the mega-merger rage in the mid to late 90s, were much more symptomatic of better trading conditions, and a stable operating environment. These were deals typically driven by businessmen, not corporate financiers.

It is also worth remembering that earlier in this current cycle, when an M&A surge was viewed by many as an inevitable consequence of strong balance sheets and cheap money, management teams were much more circumspect about deploying capital.

All of this is happening against a backdrop of recent substantial share price outperformance of small and mid sized companies compared to their larger brethren. This is in itself normally a sign of an improving corporate environment.

We have always been much more inclined to listen to the management teams of companies than the talking heads on Bloomberg or CNBC. Whether we take this literally, or through their actions, the prevailing message is one of exploiting opportunities, not hiding behind the sofa.