Mixed messages – What still elevated levels of M&A activity may be telling us that the stock market is not

By Greg Smith, Head of Retail at Devon Funds

Unprecedented levels of stimulus and ultra-low interest rates, along with better than feared economic outcomes, saw many stock-markets scale new record highs. Valuations were propelled higher as investors saw the stay-at-home thematic turbo-charging the growth prospects of many industries, and the technology sector in particular.

The lift-off in interest rates, which New Zealand saw last October, and the rest of the world is seeing now, has seen optimism fade on a number of counts. The inflation that has emerged as a consequence of the financial stimulus administered during the pandemic response has been propelled further by the war, ongoing supply chain blockages and labour market tightness. Central banks are doing their best to douse the flames, and as such investors are concerned about whether economies will be able to withstand this or will suffer significantly as a result.

Many commentators are also coming out and making predictions around a recession, hitting on the fairly obvious notion that higher lending rates will hit consumers and businesses hard, compounding the existing ill effects of inflation. Markets generally appear to be pricing in the “R” word, and this has arguably driven much of recent volatility.