Citi Sees $1.4 Trillion M&A Boom as `Catch-Up,' Not a Stock Peak

(Bloomberg) -- Getting worried that this year's whopping $1.4 trillion mergers and acquisitions boom might signal exuberance in the stock market? We're not there yet, according to Citigroup Inc.

The strong revival in takeovers since the start of 2018 only reflects a catch-up in M&A volume with the equity market rally and shouldn't be seen as a “sell” signal, Citi strategists led by Robert Buckland said in a note.

Last year, as the MSCI ACWI Index surged 22 percent, M&A activity worldwide fell 6 percent, creating a value gap of $1.5 trillion, according to Citi. Following the recent flurry of deals, the gap has shrunk to $800 billion in 2018. Acquisitions involving British firms in particular have been driving the acceleration in global deals, as cheap valuations and a weakened currency fuel a surge in foreign takeover interest.

“At first, this might suggest excessive exuberance and caution on the future direction of markets,” the Citi strategists wrote. “However, if we adjust for market cap, activity does not yet look especially high. We think that the recent surge in M&A looks more like catch-up with strong equity markets, than a red flag for equity investors.”

No matter how impressive, the M&A activity of the past six months is equivalent to about 3.2 percent of global market capitalization, still “well below” the 5 to 6 percent reached during previous bull market peaks, the strategists wrote. It would take another couple of big M&A months like April before the level reaches 3.5%, which would be a red flag for the market, they said.

--With assistance from Sofia Horta e Costa

To contact the reporter on this story: Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Blaise Robinson, John Viljoen

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