Engagement and activism may rebound

We looked at the Factset SharkWatch database, which tracks global activism campaigns for the last ten years. The dataset initially covered only US campaigns but in recent years has improved its non-US coverage to the extent that we believe it now provides meaningful statistics for Asia-Pacific.

The primary observation is that, while global activism has already started to rebound from the depths of the pandemic – rising 5.2% since 2020 – this growth has all been driven by campaigns outside Asia-Pacific. Figure 1 shows how Asia-Pacific activism (which accounts for around 17% of the total) is still down by 37% compared to 2020, even as the rest of the world has risen 13.7% (note that we considered only campaigns announced in January to May of each year, to make the results comparable across years). ... more

A tailwind from dispersion

The main success factor for a relative value strategy is the absolute level of spreads, and as discussed extensively in recent newsletters, the narrowing of value spreads which started in November 2020 is still intact and contributing positively to performance.

A secondary success factor is a high level of dispersion, or the degree to which individual names within the spread universe are moving independently. This is because dispersion helps to mitigate the impact of the inevitable periods of overall spread widening which occur from time to time. It allows rotation out of names which are narrowing against the trend, and into other names which are widening. ... more

Record Q1 for M&A

M&A activity in Asia-Pacific is trending at a post-GFC record:

Several drivers exist in our view: ... more

Implications of bear steepening

Interest rates are in focus, with long-term Treasury yields rising steadily, the curve steepening and implied volatility moving higher.

We have previously considered the effect of these trends on equity relative value performance. How about the impact on corporate merger activity? ... more

A turning point?

We may finally have seen a turning point in the under-performance of Value.

The volatility of the Value / Growth ratio in Asia-Pacific surged to 30% on 6 November. The last time we saw a similar level was just over twenty years ago, on 10 April 2000:

This is significant because ... more

Worst performance of value since 1926

We continue to have a strong conviction in a strategy of buying companies at 80-90% discount to NAV, with an expectation of a catalyst for value realisation.

While over the long-term this has proven to be a very effective strategy, it has performed poorly over the past year.

What could be the cause? We believe the global underperformance of the value factor is the main culprit.

We have previously illustrated this using benchmarks from MSCI and Russell Investments. However, to show just how extreme the current moves are, ... more

Deal activity still resilient in Asia-Pacific

Recent headlines such as “With M&A Hit, Wall Street Bankers Keep Busy With Stock Sales” (Bloomberg, 28 May), “Bankers fear sustained M&A slump: ‘It’s impossible without face-to-face meetings’” (Financial News, 8 June) and “Pandemic fears grip M&A as deal making slumps to 23-year low in Europe” (MarketWatch, 30 June) suggest a very depressed market for corporate transactions this year.

However, the numbers in Asia-Pacific tell a different story: ... more

Current trends in Asia-Pacific M&A

The figure below shows the cancellation / completion ratio of Asia-Pacific deals going back twenty years. The chart shows how this year has been a huge outlier, with the ratio moving well above two times, compared with a historical range rarely exceeding one. In other words, in 2020, more than two deals have been cancelled for every deal that has completed. This indicates the scale of the disruption in the M&A space this year.

What does this imply for M&A investment returns for the rest of the year? We think they will be strongly positive for the following reasons: ... more

A perfect storm

• Earnings are falling precipitously. Acquirers are calling off deals by invoking Material Adverse Change (MAC) clauses. Many transactions have either broken or widened out to spreads of 30% to 70%.
• Even less-risky deals are seeing much wider spreads due to forced de-leveraging. For example, we saw annualised returns in Japan which have been around 2-3% for months blow out to 40%+ at one point.

The disruption in the M&A space has been more severe than during the GFC, as this time the correction has been stunningly abrupt. ... more

The case for tailored relative value

The figure below shows is an 18-year chart of the MSCI AC Asia ex-Japan Growth and Value indices. Growth tracked Value very closely over the entire period up to 2017. Since then, Growth has significantly outperformed.

Why is this? ... more