After a miserable start to the decade, investors have clearly decided it is time to party again. Confidence is rising: an FT/Economist Global Business Barometer survey showed that almost half of executives polled expect the global economy to get “better” or “much better” over the next six months. Economic statistics do not fully justify this optimism: this week, Asia’s two largest economies disappointed, with activity in China contracting and Japan growing below expectations. But markets were quick to shrug off the doubts. Good data from US manufacturing led the S&P 500 equity index to around record highs.
Calm has also returned to the bond market. One might well wonder why. After all, political instability has returned to Rome, after Matteo Renzi ousted Enrico Letta to become Italy’s new prime minister. Yet investors barely noticed. Italian bond yields are comfortably near pre-crisis levels, a sign that markets feel broadly positive about Mr Renzi’s reformist instincts. Elsewhere in the world, the incipient crisis in emerging markets has receded, with currencies stabilising after the losses incurred at the start of the year.
Where investors are showing even more enthusiasm is in their appetite for new deals and initial public offerings. The IPO market in Europe is set for its busiest start of the year since the crisis, with up to $11.5bn worth of flotations already lined up. Dealmaking in the US is also back to 2007 levels. Figures from Thomson Reuters show that the volume of M&A announced in the US so far this year has reached $467bn, a 48 per cent increase on last year.
The symbol of this new wave of acquisitions is the purchase by Facebook of WhatsApp, a fast-growing chat application. Mark Zuckerberg, founder and chief executive of the world’s largest social network, decided to splash out up to $19bn on a company with just 55 employees, run on as little as $60m of funding. The price of WhatsApp, which provides users with low-cost text messages, was whopping even by the extravagant standards of Silicon Valley. The deal was worth more than 10 times what Google spent on YouTube, and more than 20 times what Facebook shelled out for Instagram, another app.
Some analysts believe the price Facebook paid is fair given WhatsApp’s 450m users and the direct threat it poses to the social network’s dominance. Others, however, fear a return of the dotcom bubble: the value of tech deals so far this year has reached $50bn, a level not seen since early 2000. Either way, these displays of exuberance are clearly linked to the abundance of liquidity in markets, courtesy of the expansionary policies of the largest central banks.
There are increasing signs, however, that this monetary largesse may be about to end. True, the Bank of Japan chose to open the monetary taps again this week after growth disappointed. The European Central Bank is widely tipped to loosen further to keep deflation at bay. But in Britain, where the labour market continues to strengthen, Martin Weale, a member of the Bank of England’s Monetary Policy Committee, said that Britons should prepare for a rate increase in 2015. Across the Atlantic, minutes of the January meeting of the US Federal Reserve showed strong support for tapering, which is expected to continue throughout the year.
The looming change in monetary conditions may help to explain why so many private companies and start-ups are keen to tap the capital markets or to throw themselves into the arms of larger buyers. Investors, however, should beware: what central bankers giveth, central bankers taketh away. Amid market revelry, it is hard to distinguish the inebriated from the sober. But one day, the punch bowl will be taken away. Then the hangover will begin.