Scott says that although the market will not slump to 2000-2003 proportions, a slowdown in profits and earnings of companies and growing M&A activity could see it reach more realistic levels.
He says: “The UK is facing more economic headwinds with rising interest rates, rising inflation and a volatile exhange rate. This is going to be reflected in company profits which I don’t think the market has quite factored in.”
Scott says the growing M&A activity has resulted in the market becoming overly speculative and driven it to record highs, however the cost of debt for private equity firms is becoming more of a burden, something which may cause problems should market conditions change.
He says: “With credit spreads narrow and volatility low as well it is understandable that risk appetite is very high. If that changes, then that prop of the market could also disappear.”
Resolution CIO James Smith has echoed Scott’s comments, claiming that the market is becoming “dangerously obsessed.”
He says: “Credit seems to be very cheap to the private equity firms. The tail is wagging the dog. One of the more concerning aspects now is that it is not just the poorly-run firms which are being taken over – it is also the good firms with little scope for restructuring. You wonder where the private equity firms are going to squeeze the extra profits from.”