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Invesment View: Crude awakening

If you are seeking justification for the continued buoyant state of the stockmarket, look no further than the rising level of M&A activity. A trawl through last week’s financial pages would have found mentions of a potential bid for Scottish Power from Eon, a further chapter in the saga over Old Mutual’s long mooted acquisition of Skandia, Deutsche Poste casting its eyes over the books of Exel and even a deck-clearing exercise by Euronext as it looks at a possible offer for our own London Stock Exchange.

What do these bids have in common? They cross geographical boundaries and demon-strate that the long-awaited consolidation of European businesses looks to be getting under way in earnest. Admittedly, the driving force behind individual bids will vary from situation to situation.

Last week saw Gas Natural announce an unsolicited offer to take over Endesa, which would give the Spanish energy group control of the country’s biggest electricity generator. This is, of course, a Spanish company bidding for another Spanish concern. Back home, there is a good chance that the company supplying you with water or electricity is owned by a European utility giant. Expect more foreign ownership of these services.It is dangerous to build an investment strategy purely on takeover activity but this current trend provides welcome support to a market where fears are building of an economic slowdown brought about by the continuing high price of oil.What all this has done is to demonstrate how important it has been to include exposure to commodities in investment portfolios over recent years. Moreover, some comfort from what has happened does exist. Look at the way in which higher energy costs are failing to impact upon inflation. True, there has been an increase in the headline numbers but there is little sign that core inflation is rising. Companies appear to be absorbing the price increase through a reduction in profits – possible because of the robust recovery in corporate profitability recently.There is another silver lining, too, in the way in which pressure is now growing on the Federal Reserve Bank to keep interest rates on hold. A further rise had certainly been expected – and should not be dismissed entirely. Opinion, though, is now swinging toward rates being kept on hold. Meanwhile, our own Bank of England has kept rates unchanged, which was only to be expected.The minutes of the last meeting demonstrated that opinion was split throughout the Monetary Policy Committee as to the wisdom of a cut. With inflation now above the Chancellor’s target, there appears little room for further easing, whatever retailers may request.

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