Although the market has remained flat for most of this year, mainly because of economic concerns and...
Although the market has remained flat for most of this year, mainly because of economic concerns and geopolitical risks, overall there is room for further upside.
We predict the year end to be up on the quarter, although the market may get nervous before the US elections next month, as well as being concerned over the ongoing threat of terrorism.
The strength of oil prices, fears over the weakness of the economic recovery, especially in Europe, the potential slowdown in growth in China and the lack of capex within the corporate world have all delivered market neutral signals.
Any signs of initial recovery were expected to have been led by the corporate sector through capex spending, in particular IT software companies and engineers. But what we have seen is companies opting to give capital back to shareholders at a stage in the cycle when we were expecting to see it spent on businesses themselves.
However, signs of growth are coming through, as takeover speculation mounts and we see evidence of a return to larger M&A deals.
One of the biggest deals to emerge so far this year has been between French drugs giants Aventis and Sanofi Synthelabo. Aventis accepted a stock and cash bid by rival Sanofi, in a deal that creates the world's third-largest pharmaceutical company behind Pfizer and Glaxo.
More recently, Spain's largest bank, Banco Santander, made clear its intention to revive Abbey National when it bid £8.35bn in August after failing with an approach in May. UK rival HBOS then joined in the offensive and announced it was also considering a bid, but not before asking the EU questions about the relationship between Royal Bank of Scotland (RBS) and Santander.
Indeed, last month, Santander took steps to end its alliance with RBS by selling its £1.2bn stake in the bank to counter clearing objections to its planned takeover of Abbey. Santander, which has now agreed a friendly takeover with Britain's sixth-largest mortgage lender, has announced it expects to complete the deal by November.
The latest approach comes from Tele2, the Swedish telecommunications operator, which raised its cash offer for the broadband company Song Networks last week as it intensified a bidding war with its Danish rival TDC. The takeover battle shows no signs of abating yet.
Earnings across the market have tended to meet investor expectations, with the exception of food manufacturing companies such as Unilever, which has issued a series of profit warnings over the course of the year.
At the other end of the spectrum, the likes of Ericsson have consistently upgraded their earnings outlook, suggesting the worst is behind us in the telecoms sector.
At the moment, there is a discrepancy between the levels of risk in the equity market and the tightening of government bond yields. However, we feel the risk premium is certain to come down.
Return to larger M&A deals.
Earnings have mostly met investor expectations.
Risk premium on equity market due to come down.
Lack of corporate capex spending.
Fear of weak economic recovery.
Potential slowdown in Chinese growth.