QE: Quite Extraordinary – The collapse of the UK transactions market. Are we at a tipping point?

An improvement in confidence has not led to increased activity

Global business confidence in economic and financial conditions has soared in the last 6 months according to EY’s 8th Capital Confidence Barometer for April 2013 – based on a survey of around 1,500 businesses worldwide, 10% of which are in the UK. Recent survey data confirms this trend with confidence improving across a range of indicators.

However this growth in confidence has not translated into action in the M&A market. Quite the opposite in fact with global transactions volumes falling 12% in the first half of 2013 compared to the same period in 2012.

The UK transactions market is close to historic lows

The UK market has suffered a dramatic fall. UK quarterly deal volumes fell to 450 in the second quarter of 2013, the lowest level since September 1994 and less than half the peaks of June 2000 and June 2007. As shown in the chart, the relationship between deal volumes and the FTSE 100, which was a very reliable predictor of deal volumes between 1992 and 2009 has completely broken down.


While the slump in confidence and the length of the economic slowdown have undoubtedly influenced corporate behaviour, it does seem as though QE has distorted the UK transactions market. This is most likely to have been caused by the impact of increased liquidity and lower sovereign yields on valuations, causing values to move out of line with the underlying business economics.

Are we at a tipping point?

With confidence improving, could we be on the verge of a surge in transactions activity?  If we look at the periods of similarly low activity, such as 1997 and 2002, the market suddenly surged and reached record levels of activity.

We could be facing a similar situation over the coming months. Transactions activity has fallen and so has capital investment – down 34% since 2008 and 16% this year alone. With profits under some pressure, business cannot afford to wait forever. If the economic data continues to be positive and confidence remains high then we could see activity build. With a few early movers, momentum may gather pace and we could see a battle for high quality assets.

If things are moving then business needs to have its options ready and to be able to move quickly. The EY Rapid Growth Market Forecast and Monday’s upcoming EYITEM Club Summer UK forecast are perfectly timed to provide us with a detailed perspective on economic prospects and the impact for business.

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