Societe Generale says equities look favorable compared to credit. They see the M&A cycle as playing a key role in potential future outperformance:
M&A cycle very strong start in 2011.
Definitive signs of accelerating.
Europe lagging take-off occurring in the US.
Support at the macro level:
– historically low real interest rates
– vanishing fears of double–dip recession
– attractive stock prices
Support at the micro level:
– corporate deleveraging
– strong cash positions
– productivity gains in the wake of the global financial crisis
Equities tend to outperform credit when the M&A cycle gets stronger.
Switch progressively asset allocation in favour of equities.
– Early stages of M&A cycles: rather neutral for credit as they take place under conservative funding structures. The use of cash for completing acquisitions is currently at record levels.
– Later stages: credit quality usually deteriorates as result of more aggressive funding structures. If cycle gathers momentum as we expect, our preference for equities will be more pronounced.
Source: Societe Generale
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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