Transaction market conditions
The Nordic equity market has continued to climb during the autumn and is up almost 20% YTD. The key driver is still a very low interest rate, which makes equities the preferred asset class. Other positive drivers during the autumn have included the European recovery, re-acceleration of Chinese growth and increased M&A activity. The US political battle about short-term and long-term budget issues has hardly affected the equity market.
Low interest rates are bullish for equities – and they will prevail. Low interest rates would be problematic if they signaled weak profitability and poor cash distribution capacity. However, this is not the case. The return on equity on the Nordic market is an impressive 15%, cash flow is strong and corporate indebtedness is low – all supporting sustainable and high dividend that exceed bond yields. This is the key reason why equities are the preferred asset class currently. The search for yields is possibly also the main reason why low beta stocks have outperformed high beta stocks so far in the recovery. Investors have mostly looked for exposure to bond-like stocks with high dividend yields and stable earnings, which has led to significant earnings multiple expansion in these stocks.
After several years with very few initial public offerings, several companies have recently been introduced to the stock exchanges. For example, there has been 14 IPOs in the Nordic market during 2013, of which Carnegie has been involved in Atlantic Petroleum, Sanitec, Napatech, Matas, Multiclient Geophysic, Asetek and EAM Solar. Several companies are also preparing for listings in the beginning of 2014.
Following a fairly disappointing first quarter of the year for M&A activity, the Nordic region saw an extremely eventful Q2 2013 with 131 transactions, compared to 98 in Q1 or 95 in Q2 2012. This led to lower activity than expected during Q3 2013, where the total number of transactions in the Nordic region decreased by 35% compared to the same period last year. However, the total M&A transaction volume in the region was still unusually high, experiencing a significant increase of 250% compared to the same period last year. On the back of an attractive capital market climate there are several good reasons for further improved M&A activity, including better economic activity, higher risk appetite among investors, strong earnings improvements across several sectors and access to cheap financing.