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Global M&A Momentum to Wane in 2019? ETFs in Focus

Sanghamitra Saha
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Mergers and acquisitions have been rampant across the globe this year. But the year ahead may not be as active.The drive for mergers and acquisitions has slowed to its lowest in four years, per a global survey conducted by Ernst & Young (EY), thanks to the looming uncertainty emanating from Brexit and the U.S.-China trade war (read: M&A Hits Record in 1H: Ride High With These ETFs).

Less than half — 46% — of about 2,600 global executives intend to purchase other firms in the next 12 months, marking a 10% drop from the previous year, EY said in its biannual "Global Capital Confidence Barometer" report.

Executives see regulation and geopolitical risks as the biggest hindrance to deal-making activity over the next year, as quoted on CNBC. The momentum is likely to slow down “despite stronger-than-anticipated first-half earnings and the undeniable strategic imperative for deals.”

Investors should note that U.K. M&A volumes plunged by a third during in the third quarter “after the quietest quarter for deal activity since 2012” according to Mergermarket, as quoted on law.com.

Same is the situation with China, which is reportedly exploring ways to hit back in the escalating trade war with the United States. This is why some corporate deals with American buyers could be in danger, per nytimes (read: China's Likely Retaliation to US Tariffs & Its Impact on ETFs).

Several cross-border deals involving American and Chinese companies are under review by Chinese market regulators. Walt Disney Company’s $71 billion acquisition of 21st Century Fox falls under the group of such deals. This deal has a deadline of approval on Oct 19 (read: US-Sino Trade War Escalates: Most Vulnerable Sector ETFs).

What Lies Ahead?

It is just political worries that are blocking the path of jumbo deals, otherwise the underlying momentum is pretty solid. The EY report indicated that 90% of company executives are expecting the M&A scenario to recover in the second half of 2019.

EY noted that the ongoing situation was likely “just a pause, not a complete stop.” Many companies are relying on M&A to lower the likely adverse “impact of trade and tariff policies, secure market access and protect supply chains."

The United States was at the top spot, followed by U.K., Canada, Germany and France. These countries are involved in trade tensions. Hence, companies are striving to finalize the deal “ahead of potential geopolitical disruption."

ETFs in Focus

Below we have highlighted two merger ETFs to can be avoided for a likely decline in M&A deals in the near term.

IQ Merger Arbitrage ETF (MNA)  
This fund offers capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer while at the same time providing short exposure to global equities as a partial equity market hedge. This is done by tracking the IQ Merger Arbitrage Index (see: all the Hedge Funds ETFs here).

 ProShares Merger ETF (MRGR)  
The underlying S&P Merger Arbitrage Index provides exposure to a global merger arbitrage strategy, which looks to replicate the spread between the price at which the stock of a company trades after a proposed acquisition of such target is announced and the value that the acquiring company has proposed to pay for the stock of the target. The index takes long positions in target securities.

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IQ-MERGER ARB (MNA): ETF Research Reports
PRO-MERGER (MRGR): ETF Research Reports
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