The one fillip to the excitement-deprivation caused by the low volatility has been the resurgence of merger activity, especially in the IT and the Health Care sectors. While newly emergent technologies have always drawn a high degree of M&A activity, the buoyant market for initial public offerings and the rapid changes in the social media and data center management have led to feverish activity in that sector. Whether in IT or Health Care, what is clear is that the market may, at last, be interested again in companies that invest for growth, either by investing in research or in organic expansion, or by acquiring related businesses. The singular feature of much of the M&A activity announced this year is that the share price of the predator/acquirer has reacted well—often rising—to the news of the potential transaction. The market is starved for growth, and is giving somewhat more benefit of the doubt to managements who will take steps to deliver it. This attitude is a sea change from the past couple of years, when investors’ focus was on dividend yield (as it continued so, with Utilities, this quarter) or on the return of capital through share buybacks.
After many years of voting for promises, Indian voters now seem to be demanding a real change with the landslide victory in May of Narendra Modi, a noted reformer and politician credited with getting things done. India hasn’t been getting it done. Inflation has more than doubled over the last 10 years, with demand fueled by social grants and supply stymied by corruption and political gridlock. As a result, productivity has fallen and the currency weakened. We believe that the most important achievement of the Modi government would be to remove supply-side constraints by reducing red tape and corruption. We see great potential arising from increased political accountability: deliver, or out. If this becomes the new norm, especially at state and local levels, then India may be on the doorstep of much-needed change and progress on key issues such as infrastructure build-out and energy reform.
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