Asia is on course for its worst year of mergers and acquisitions activity since 2009, as volatile markets sap confidence and dampen deal-making.
Asian companies have bought fewer assets both within the region and elsewhere, while the total volume of announced deals targeting companies in Asia – excluding Japan and domestic Chinese deals – is at its lowest since 2009, according to data from Dealogic.
Deals within mainland China are running at record levels, making it by far the region’s largest market. However, among western banks only the joint ventures run by UBS and Goldman Sachs have licences to advise in mergers between public Chinese companies.
Excluding Chinese domestic deals, M&A targeting Asia ex-Japan totals $218bn so far this year, down from $237bn for all of 2012 and the lowest since 2009’s $191bn.
While a handful of large deals in December could still change the outcome for 2013, the current total would represent the fourth straight year of waning volumes since a recent peak of $272bn in 2010.
Morgan Stanley was the lead adviser for the region working on $40bn worth of deals, according to Dealogic, followed by Goldman Sachs and JPMorgan.
Bankers say a big issue has been the caution among Chinese groups in the wake of the leadership transition, as Xi Jinping took over as China’s president in March and installed a new administration.
“There has been limited risk appetite among Chinese state-owned companies looking outside of China this year,” said Richard Campbell-Breeden, head of M&A Asia ex-Japan at Goldman Sachs. “People had expected more M&A activity after the leadership change earlier in the year but that hasn’t been the focus.”
Nevertheless, outbound Chinese deal activity has been decent. Total volumes for the year to date are $67bn, just ahead of last year’s $65bn, helped by Shuanghui’s $4.7bn takeover of fellow US pork producer Smithfield Foods.
As for western groups considering Chinese acquisitions, one banker put it this way: “The new administration has come in and scared the shit out of everyone. They’ve been putting people in jail and that doesn’t instill a lot of confidence.”
Onshore Chinese deal volume hit a record of $193bn, up by almost one-third from $148bn for full-year 2012. The surge has been led by the real estate sector, which accounted for $38bn of the total, more than double last year’s level, according to Dealogic.
The biggest Chinese deal was the $16bn acquisition of a 13.5 per cent stake in Shanghai-listed electricity company Huadian Power International Corp by its parent, China Huadian Group.
Rob Sivitilli, head of M&A for Asia ex-Japan at JPMorgan, also noted a theme this year of Chinese groups shuffling assets into or out of Hong Kong vehicles.
“What we have seen a lot of is Hong Kong-related business with Chinese and local groups reorganising assets,” he said. “This is not going to sustain our business so it’s good to see more diverse activity coming.”
Colin Banfield, head of M&A Asia ex-Japan at Citigroup, expects more private sector-led deals in the year ahead and says activity has already picked up following the big Communist party policy-setting meeting that took place in November.
“Following the third plenum and the commitment to market reform, we have seen a noticeable pick-up in dialogue with Chinese private sector and [state-owned enterprises] regarding a wide range of M&A situations,” he said.
Mr Campbell-Breeden said: “I think in 2014, we will see much more emphasis on the private side looking to do more deals overseas to get technology, expertise and raw materials as well as the more politically driven state-owned enterprise interest.”
This week I am going to attempt something that I have never tried before.
I am going to try and read your mind.
But before I do that, let me first paint you a very quick picture about what has been happening in the stock market this year.
Since the start of the year, the Dow Jones Industrial Average has risen around 24%. Meanwhile, the UK's FTSE 100 index has gone from around 5,900 points to about 6,450 points to register a 9% improvement.
So far, so good
However, our Straits Times Index has done nothing. In fact, it has lost around 3% of its value this year.
So, those of us with a diversified portfolio are probably wishing that we had allocated more (if not the whole kit and caboodle) to western equities at the start of the year to capitalise on the revival of western markets.
Am I right or am I right?
After all, what is the point of holding a diversified portfolio when underperforming shares can drag down the overall returns on our investments?
What is the purpose, say, of investing some of our money in the Straits Times Index through an index tracker such as the SPDR STI ETF, when it would have been better to put the money into a UK or US index tracker instead?
If we take the argument to its logical conclusion, would it not have been better to invest in rising stocks just before they go up and sell falling stocks just before they start their decent? That way we can continually swing from one investment to another and make lots of money - without making any losses - in the process.
The impossible dream
But let me save you a lot of heartache, pain and time. It is nigh on impossible to time the market. And those who try could end up losing money instead.
In fact, Warren Buffett once joked that investors who try to time the market will do very well for their brokers and not very well for themselves.
He is right.
Truth is, diversification always seems like being the wrong thing to do at any given moment in time. That is because a diversified portfolio by definition contains a number of different investments. And at any point in time, some might do well; some might do badly and some might not do anything at all.
But that, interestingly, is a sign of a properly diversified portfolio. If everything did equally well at the same time, then chances are your portfolio is not very well diversified at all.
The point about diversification is that it is supposed to spread the risk of investing. It is not meant to be exciting - at least not in the short term. It is supposed to do the exact opposite. It is designed to take the short-term thrill out of buying shares and, instead, deliver long-term rewards for patient investors.
The operative word is long-term. But we private investors have a terrible habit of ditching our losers at exactly the wrong time. It is, to some extent, understandable because we always want to substitute pain for pleasure. That is why many of us try to look for quick fixes to our portfolios when things do not appear to be going too well.
Currently, there are calls for investors to look west because that, apparently, is where the action is. Some of you might even be tempted by the siren call of the west.
As for me, I am looking east because that is where the action is not. Some people call that being contrarian. I just call it common sense because the best place to unearth investing gems is where others are not looking.