Tatton Investment Management shares their thought leadership piece, as part of Tenet Compliance Services Professional Development Programme.
Anthony Graham, CFA
Investment Manager
Anthony is focused on investment management, responsible for fund selection and contributes to the AIM Portfolio Service. He is an active member of the Tatton Investment Committee and Ethical Investment Committee. Prior to joining Tatton, Anthony acted as a Portfolio Manager focusing on centralised investment propositions.
For years, the relationship between the MSCI All Country World Index (ACWI) and Merger and Acquisition (M&A) activity was a well-worn path. A rising ACWI, reflecting a bullish stock market, often coincided with a surge in M&A deals as companies looked to expand and capitalise on easy access to capital. However, the last two years have seen a surprising breakdown in this correlation, leaving many investors scratching their heads.
Historically, a strong ACWI signalled a buoyant market environment. This made M&A deals more attractive for several reasons. First, with inflated stock prices, companies could use their shares as currency for acquisitions, making them a more enticing option than cash. Second, low-interest rates made borrowing for acquisitions cheaper, further fuelling dealmaking activity.
The breakdown in the M&A-ACWI correlation highlights the evolving dynamics of the financial landscape. While the stock market may still be a good indicator of overall economic health, it no longer provides a foolproof signal for M&A activity. Investors looking to gauge deal flow will need to consider a wider range of factors, including interest rate trends, regulatory environments, individual company strategies, and the geopolitical climate.
This decoupling presents both challenges and opportunities. For companies, it may necessitate a more creative approach to deal structuring and demonstrating true value. For investors, it underscores the importance of in-depth research beyond just the headline index performance and a focus on the underlying fundamentals of potential acquisition targets. The future relationship between the ACWI and M&A activity remains to be seen, but one thing is certain: in an era of higher rates, scrutiny and security, the old rules no longer apply.
For more information about Tatton, please visit www.tattoninvestments.com
