UBS Analysts Expect Further M&A Activity

With the strength in M&A activity expected to be fairly broad-based across most sectors, they see the greatest expected increase in the Technology sector – driven primarily by the health of corporate balance sheets and ample cash reserves. Overall sentiment regarding near term earnings guidance continues to improve, with our latest survey showing a slight positive bias towards expectations in Q2 ’14.

Overall sentiment regarding near term earnings guidance continues to improve, with our latest survey showing a slight positive bias towards expectations in Q2 ’14 (compared to a slight negative bias in Q1). In our most recent survey, 26% of UBS analysts expect near term earnings guidance to be revised higher (vs. 19% in Q1), while 23% expect earnings guidance to be lowered (vs. 24% in Q1).

Based on the survey, analysts continue to see upward pressure on wages, driven in part by emerging markets. 57% of respondents see upward pressure while only 8% believe wages will be subject to downward pressure. Analysts’ view on inflation’s impact on profitability skew slightly negative on balance – 30% of analysts believe an increase in inflation would contribute to profitability versus 40% who believe it would detract from profitability.

As corporate cash balances remain elevated, analysts continue to expect that companies are likely to put their excess cash to work via continued M&A, increased dividends and ongoing share repurchases.

With the pace of overall M&A increasing over the first two quarters of 2014, in our 20th survey to asked analysts, “For the second half of 2014, do you expect the pace of M&A in your sector to…” The department was asked to select from the following: “Increase,” “Decrease,” “Remain Unchanged,” or “Not applicable (not sector analyst / associate).”

Of the 314 respondents, approximately half expect M&A volumes to increase in the second half of 2014, while 45% expect the pace to remain unchanged (i.e. continue to be quite healthy going forward). This compared to only 4% who expect the pace of overall M&A activity to decline. The level of optimism was fairly broad-based by sector, with analysts covering Technology exhibiting the most confidence (75% expect an increase) and analysts covering Financials showing the least confidence on a relative basis (35% expect an increase).

Similarly, the results on a regional basis highlight a similar level of broad-based optimism, with the exception of Latin American analysts where only 25% of analysts (compared with an overall average of 50%) expect M&A deal activity to pick up into the second half of the year.