Markets: Post-poll M&A musings

At Rockpool restaurant this week Tim Baker, Deutsche Bank’s cherub-faced Australian strategist, made a prediction as to who will win the federal election.

Baker, speaking to a crowded table of journalists who seemed to give as much attention to Neil Perry’s food as Deutsche Bank’s predictions on politics and markets, was unequivocal in his judgment on who will become prime minister. Kevin Rudd will be forced to leave the Lodge for a new occupant, Tony Abbott.

There is a 90 per cent chance of the Liberal/National coalition winning on September 7, says Baker. But, he hastens to add, the policy differences between the current Labor government and the opposition are minimal.

That, says the former Reserve Bank of Australia economist, means the stock market will not bounce on a Tony Abbott win. Any gains in share prices will come about because of expectations of better dividends, margins and profits in 2014, says Baker. Politics is not a major influence on the stock market at present. Besides, Baker says, a Coalition victory has already been priced into stocks.

But not too far from where Baker was speaking, others say an Abbott victory will kick-start mergers and acquisitions.

Lawyers who advise companies and investment bankers say a resounding Coalition victory would breathe new life into a moribund takeovers market as a business-friendly government with a firm mandate will give chief executives confidence to do a deal.

To date in 2013 there have been $36.3 billion worth of takeovers in Australia. In 2010 there were $110.81 billion and last year there were $57.4 billion, according to Bloomberg data.

Already companies are tentatively planning acquisitions bolstered by their better share prices that they can use as takeover currency, some analysts including Deutsche Bank say. The S&P/ASX200 Index is up 19 per cent in the last 12 months. 

Companies may have to marry a rival because of balance sheet pressures, says Deutsche Bank. Mining services companies spring to mind.

“Mining services guys are under pressure,” says Baker.

Still, some caution that an Abbott-lead cabinet is not suddenly going to propel M&A activity.

Chief executives and their boards will want to see what a Prime Minister Abbott does. The domestic and international economic and political environments are always important and, more importantly, companies need to be convinced a deal will boost their bottom line relatively quickly.

Baker forecasts 7-8 per cent earnings growth in 2014 and a similar rise in the S&P/ASX200 index, which has already outperformed the MSCI World AC Index by about 3 per cent this month.

If more M&A activity does occur, that may drive the stock market higher. Baker’s prediction of 5500 by June next year, instead of looking rather bullish, could be modest.