- Activity in Australian M&A has increased by 195% over the past 12 months.
- Morgan Stanley says the recent rise in US interest rates, relative to Australia, means it’s now cheaper for local companies to raise funds for acquisitions.
- The analysts expect the domestic M&A cycle to remain strong, as activity shift away from corporate investments towards private equity.
It’s been a rough month for the Australian stocks, which have now given up their 2018 gains as both domestic and global risk factors weigh on sentiment.
Markets more broadly have had to readjust to a permanent shift higher in US interest rates, which has seen benchmark US 10-year bond yields settle in a higher range above 3%.
But there’s one area of the Australian economy where business is booming — mergers & acquisitions — and Morgan Stanley thinks that has something to do with the recent shift in US interest rates.
Data from Dealogic shows that for the 12 months to the end of September, domestic M&A activity rose by 195% to $US58 billion.
At the same time, global M&A fell 3% to $US875 billion.
Morgan Stanley said the changing composition of global rates markets is an area which has “received less attention” in explaining the shift.
While the US Fed has stuck to a steady rate-hike path over the last two years, benchmark cash rates in Australia have held steady at 1.5%.
As a result, five-year funding rates in Australian-dollar terms have only risen by 42 basis points (0.42%) in that time, to 2.42%.
That stands in stark contrast to five-year US-dollar rates, which have jumped by 210 basis points to more than 3%.
“This helps underpin an attractive cost of capital for potential transactions and may help explain why Australian M&A is holding up better,” the analysts said.
They also noted the recent decline in the Aussie dollar, which is currently trading at around US71 cents — below its long-term inflation-adjusted average of US74 cents.
“We see the potential for the AUD to remain weak as RBA/Fed policy rate differentials widen over the next nine months and the domestic housing correction continues,” Morgan Stanley said.
Ordinarily, a weaker currency would encourage foreign investors into the market to take advantage of exchange-rate differentials.
However, “it’s interesting to note that it hasn’t hindered several major outbound transactions from Australian companies.”
Looking ahead, Morgan Stanley expects the key drivers of Australian M&A to shift away from big corporate investments towards private equity.
The analysts pointed to a recent AFR article which noted that domestic PE and venture capital firms now have more than $9 billion of capital to deploy.
They also noted the recent increase in participation from super funds, including Australian Super’s involvement in the takeover bid for Healthscope.
“With ASX 200 multiples now trading below their long-term average, we see the M&A cycle as likely to prove a source of support,” analysts said.
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