The ‘veritable explosion’ of financial deals has increased talk of a bubble, but Jeremy Grantham believes these fears may be misguided.
The veteran investor, who works for Boston-based GMO, made the comments in his second-quarter update.
Pointing to the ‘frenzy’ of mergers and acquisitions in the current market, Grantham said he expects this trend to continue. ‘Don’t tell me there are already a lot of deals. I am talking about a veritable explosion, to levels never before seen,’ he said.
Supporting the idea that M&A levels will continue to rise, Grantham cited the fact that the cost of real debt is lower in this cycle than in previous ones, as well as profit margins being high, and expected to stay high.
Grantham said a third reason had particularly influenced his thinking on this topic: ‘The economy, despite being in its year six of an economic recovery, still looks in many ways like quite a young economy.’
He pointed to the huge reserves of labour in the US market, with even the most discouraged of workers being drawn into the workforce. This, he said, would coincide with a pick-up in capital spending among companies.
While this scenario of a slow recovery creates an ideal backdrop for selective acquisitions, Grantham did warn that companies may drive deals more aggressively than previously.
‘If I were a potential dealmaker I would be licking my lips at an economy that seems to have enough slack to keep going for a few years. Also, individuals and institutions did feel chastened by the crash of 2009, and many are just now picking up their courage.
‘I think it is likely, better than 50/50, that all previous deal records will be broken in the next year or two. This of course will help push the market up to true bubble levels, where it will once again become very dangerous indeed.’
While Grantham, who voiced concerns about bubbles forming in his first-quarter update, is concerned about markets overheating, he said the short-term signals were not as worrying as many believe.
‘Perhaps the single best reason to suspect that a severe market decline is not imminent is the early-cycle look that the economy has,’ he said.