Morningstar Magazine - August/September 2017 - 21
Dispatches
Global Briefs
TRENDS
Political Uncertainty Slows M&A Activity
After two years of record consolidation, dealmakers
are tapping the brakes. Merger and acquisition
activity in the first half of 2017 was strong on
a historical basis, but well behind the pace of the
past two years. Deal value fell especially sharply in
Europe, where potential acquirers worried
that Brexit's separatist sentiment would manifest
and private equity firms have record levels of dry
powder to deploy, creating intense competition
for a shrinking pool of desirable acquisition targets.
in other elections. We expect activity to intensify
in the second half of the year as companies
react to recent elections and regain confidence in
their own capital deployment strategies.
Dylan Cox is an analyst with PitchBook.
Despite the slowdown, prices continue to increase.
Corporate balance sheets remain full of cash,
North America and European M&A Activity
Deal Flow
2,500
USD Bil
Deal Count
25K
2,122
2,000
20
1,698
1,500
1,000
2,215
1,149
1,190
15
1,290
10
982
727
5
500
0
0
2010
2011
2012
2013
2014
2015
2016
2017
Source: PitchBook. Data as of 06/09/2017.
ToDealHedge
or Not
Flow
2,500
to BilHedge?
USD
2,000
AMERICAS
United States
1,500
1,290
1,190
Currency can have a 1,149
large impact on international
1,000
982 The past three years through
equity returns.
May are a great case in point. The U.S. dollar has
500
been on a tear, with the Federal Reserve's Trade
Weighted U.S. Dollar Index: Broad, which shows
the foreign-exchange value of the U.S. dollar
0
2010
2011
2012
2013
against a broad currency basket, increasing from
Deal Count
$102 to about $123.
25K
The U.S. dollar's strength has proved a strong
2,215
headwind2,122
for most international equity strategies,
20
as the clear majority of U.S.-based foreignequity funds do not hedge their foreign-currency
1,698
15
exposure. They buy foreign stocks in the
currency of each company's domicile. Thus, their
returns suffer when those currencies decline
10
against the dollar.
727
5
This is best illustrated when comparing the
performance of hedged and unhedged versions
of the same index. Over this three-year period, the
0
2014
2015
2016
2017*
MSCI ACWI ex US Index returned an annualized
1.26%. That same index, when 100% hedged
back to U.S. dollars, returned an annualized 6.54%.
When return differences are that stark, it can be
tempting to think that hedging is the way
forward. However, there have been many other
times over the past 20 years when similar
big currency dislocations have occurred in the
other direction.
As the exhibit on Page 22 shows, the dislocation
that occurred before the financial crisis was
even more stark. But back then, unhedged equities
received the currency boost as the U.S. dollar
global.morningstar.com/Morningstarmagazine
21
http://global.morningstar.com/Morningstarmagazine
Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2017
Contents
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Morningstar Magazine - August/September 2017 - Contents
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