SOCGEN: BUY EQUITIES OVER CREDIT DURING AN M&A CYCLE

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