In its April issue, Euromoney asks M&A bankers why – with the stock markets rallying, financing markets open, plenty of cash on the balance sheet and macro-economic tail risk apparently thinned by central bank intervention – activity level has been so low in the first quarter.
In the first three months of this year, weekly M&A volumes tracked or undershot the weak levels in the second half of 2011, when fear abounded of sovereign defaults.
“Sentiment is trending in a positive direction in the equity market, and volatility has subsided considerably,” says Michael Carr, head of Americas M&A for Goldman Sachs. “However, lower volumes in the equity markets indicate a lack of conviction. M&A activity typically lags the equity markets by three to six months, so we may see a busier second half of the year if sentiment continues to improve.”
But will that prove a false hope? Barclays analysts Barry Knapp and Eric Slover have done some research on how much of the first quarter stock market rally came down to a disproportionate contribution from one stock: Apple Inc (AAPL).
Their findings might help explain that lack of conviction: “AAPL, the largest constituent in the S&P 500, with a market cap of around $570 billion, 1.4 times the next largest company, XOM, is up more than 50% year-to-date. These factors combined have led AAPL to contribute roughly 175 basis points to the S&P’s 12% price return.
“Said differently, some 15% of the S&P’s performance year-to-date is from one stock, which contributed over four times its weight in the index. In addition, AAPL has offset 40% of the year-to-date decline in estimated 2012 index EPS.”
| AAPL's 15% contribution is the largest in our sample since 1991 |
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| Source: Factset, Barclays Research |
It is not unheard of for a single stock to make an outsize contribution to a sizeable market rally, but Apple’s contribution in the first quarter has no equal during the past 20 years.
As economic indicators turn more mixed, with US durable-goods orders slowing, Federal Reserve chairman Ben Bernanke has raised doubts over the sustainability of recent employment gains in the US. Stock market bulls face a tricky question, says Barclays: moving into 2Q12 and beyond, who’s going to carry the weight?
The Barclays analysts say Apple will have another sizeable affect on index and earnings and margins when first-quarter reports are announced in the next few weeks, and that these are likely to mask otherwise less-than-stellar trends. “Earnings growth is estimated at just 1.4% y/y, and about zero excluding AAPL,” say the analysts.
“Earnings growth has slowed substantially, and margins are under pressure due to a lack of pricing power for consumer-related companies and deteriorating operating leverage for global growth beneficiaries.”
