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Takeovers and cash levels: reasons to be optimistic?

Graham Smith

Graham Smith - Market Commentator

In times gone by – by which, in this instance, I really mean the 1980s – a popular conception was the “odd lot” theory. It was based on the questionable assumption that large numbers of small purchases going through the stock market indicated a high level of confidence among individual investors, who were more often than not wrong about where the market was headed next.


The idea was that this signal was a negative for stock prices generally. The reverse was also said to be true – that large numbers of small sells were a positive for the market. Odd lot deals were generally defined as transactions for less than 100 shares or deals not an exact multiple of 100 shares – transactions professional investors were far less likely to make.

This presumption persists in a slightly different form today. Evidence of retail investors holding high levels of cash in their portfolios is generally viewed positively, because it suggests there is future buying to be done. The underlying assumption hasn’t changed all that much though, implying that it’s good to invest when most others are fearful, and bad when everyone else is in a hurry to commit their cash.

Related to this is another longstanding assumption that corporate buyers of shares are usually better at guessing where the market is going. With a professional knowledge of their own companies and their competitors, they buy shares at the right time, when company prospects are good yet the market has plenty of upside potential left.

History shows that these are all dangerous assumptions to make. The past is littered with examples of corporate buyers who overreached just at the wrong moment – shortly before the dotcom bubble burst in 2000, for example, and again in 2007-2008 – just as it is with ISA millionaires who turned modest sums into much larger ones through judicious investment decisions.

Today, and after another year of solid gains for markets that have largely defied many year-ago forecasts, old assumptions are under scrutiny once more1.

In the US – which still accounts for more than half of the world’s stock markets by value – the cash holdings of individual investors have shrunk this year in percentage terms, although at least some of this will have been due to the rising value of their holdings in equities and bonds.

The upshot is that, at around 14% last month, the amount of cash being held by US individual investors is not especially high compared either with average levels over the past year (17%) or an average of 23% since November 19872.

In the UK – for the reasons we all know about – investor sentiment has been under more pressure, and it shows. Even as the UK stock market has risen this year – albeit on a shallower path than in the US – retail investors have been playing it safe, raising their holdings in bonds, multi-asset funds and cash and selling equity funds3.

So what about those corporate buyers? Well a weak pound will have provided an additional incentive for foreign buyers of UK assets, as will have the possibility deals not concluded under EU rules before Brexit might then fall foul of additional stipulations put in their way by the UK’s Competition and Markets Authority.

Standout deals so far this year involving foreign companies have included the merger of Just Eat with its Dutch equivalent; the purchase of the pubs chain Greene King by a company associated with the Hong Kong entrepreneur Victor Li; and the acquisition of the aerospace manufacturer Cobham by Advent International.

Even so, the value of UK deals conducted over the first nine months of this year – around £154 billion – was only about half what it was at the same point in 2018, suggesting that the economic and regulatory uncertainties posed by Brexit have been stronger factors4.

In the US, the numbers have, unsurprisingly, been in a different league. President Trump’s tax reforms, the large cash reserves of US companies and slowing economic growth – which makes growing organically relatively less attractive – have added fuel to the takeovers fire. Four of the five largest deals worldwide this year have been carried out by US companies.

These include the largest acquisitions in the pharmaceuticals and defence sectors in history – the takeover of Celgene by Bristol-Myers Squibb and the merger of Raytheon with United Technologies – each worth around US$89 billion5.

Corporate activity slowed substantially in the US and worldwide in the third quarter, as heightened concerns over the prospects for a new US trade deal with China got the better of would-be acquirers6.

However, hopes for a stronger end to the year got a boost from bids late last month for the US jeweller Tiffany and the online investment broker TD Ameritrade in deals worth US$16 billion and US$26 billion each7.

Recent trends pose little challenge to the notions that the US remains relatively attractive to both individual and corporate investors, while the UK retains investment potential owing to continuing caution over Brexit. Importantly, there has been no outlandish splurge in corporate activity in either place as yet – an event sometimes associated with the final phases of a bull market. It’s perhaps a trend to look out for in 2020 though.

Investors aiming to participate in the US growth theme or add to their holdings in undervalued companies in the UK will find a number of ways of doing so on Fidelity’s Select 50 list of favourite funds.

For example, the JPM US Select Fund tends to invest in around 60 or so US companies with attractive growth credentials and takes a long term view. Raytheon currently features among the Fund’s ten largest holdings, along with familiar names such as Microsoft, Alphabet (Google) and

Contrastingly, the JOHCM UK Equity Income Fund invests only in stocks expected to yield more than the FTSE All-Share Index in future. Every stock has to have the potential to deliver capital appreciation as well. The Fund’s investment style can best be described as contrarian, emphasising stocks undervalued or underappreciated by the market as a whole.


1MSCI World Index, 31.10.19
2American Association of Individual Investors, November 2019
3Investment Association, September 2019
4Experian, 18.10.19
5Mergermarket, November 2019
6Reuters, 30.09.19 ⁷ CNBC, 25.11.19

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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