MARKET SENTIMENT VERSUS FUNDAMENTALS

Written on the 10 May 2010

MARKET SENTIMENT VERSUS FUNDAMENTALS

LAST month didn’t quite get off to the galloping start some had predicted, but delivered a sell down in equities off the back of fear over the impact of tightened credit supply in China, amongst other things.

This month commenced with key personalities signalling that the GFC just might be over, followed shortly afterward by the emergence of Greece’s debt woes, followed by Germany coming to the rescue.

On top of this, the Australian Government has just announced that its wholesale funding guarantee (which has been greasing the wheels of credit supply in Australia since October 2008) will be withdrawn effective from the end of March this year – an interesting move given the mixed signals we’re hearing on economic sentiment abroad.

The withdrawal of the guarantee is significant for various reasons. While most of us cringe when banks announce their
multi-squillion dollar profits, the reality is that big bank profits are good for business.

The more they make, the more funds are available for entrepreneurial activity. Let’s not forget that without the introduction of the guarantee Aussie lenders had Buckley’s chance of getting their hands on the $160 billion raised while the guarantee was in place, and Suncorp Bank just might not be with us today.

That said, it begs the question: Why is the Government withdrawing the guarantee now in view of the apparently gloomy global economic outlook?

Well, perhaps it has something to do with the fact that market fundamentals aren’t really all that bad.

We’re confident that in the end, fundamentals will prevail over shaky market sentiment.

Switching Strategies for 2010

Running a dual track process is a versatile strategy which might be adopted for two main reasons. When markets are strong, a dual track process is a tool used to create competition to drive up the sell-off price.

Rewind the clock by two years and this was the primary driver for running this strategy.

However, with global markets still in a state of flux, market players are looking to this strategy for another reason – risk mitigation.

Running the strategies together creates an avenue to send strong messages to the market about value.

It also provides the benefit of an additional safety net — if one track fails to reach the desired benchmark, the other track is there to fall back on.

A commonly used dual track process involves simultaneously running an IPO and a trade sale.

Successfully running a dual track IPO trade sale process requires a high degree of planning, from choosing the project team to undertaking due diligence with multiple audiences and purposes in mind.

This should be performed with a view to filtering information that is relevant to both the IPO and to a potential vendor for the trade sale.

The trade sale process begins by engaging in a competitive bid process in order to determine the value of the company in the current market.

Expressions of interest are sought to identify and narrow the field of potential buyers.

Interested parties are typically provided with an information memorandum, after which indicative offers will be received.

Once indicative offers are received, shortlisted buyers are invited to undertake due diligence.


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