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Daily Agenda: Corporations Keep Playing Merger-Mania Game

China’s leaders focus on five-year plan; UBS earnings surprise to the upside; EU greenlights big-chip deal; mega-merger in interactive-gaming announced.

With more than 100 Standard & Poor’s 500 components releasing quarterly earnings this week, investors are focused on signals that the worst may be over for sectors battered by currency and commodity volatility, particularly as the brisk pace of merger announcements lifts valuations. On Tuesday, the Dow Jones Industrial Average again hit a 2015 year-to-date high, lifted in large part by gains in health care. For now market sentiment appears to remain resilient for U.S. large-cap equities due to a combination of reduced expectations and large corporate war chests available for deals, and despite rising expectations for a Federal Reserve rate hike before year-end that has been priced into futures markets.

Gaming merger announced. After equity markets closed on Monday, Activision-Blizzard, based in Santa Monica, California, announced its intention to acquire Dublin, Ireland’s King Digital Entertainment in a stock-for-stock merger valued at roughly $6 billion. The deal will merge King’s Candy Crush franchise into Activision’s already substantial interactive entertainment franchise and bring the total number of active gamers for the combined company to more than half a billion.

BlackRock to handle BofA money market assets. In a statement issued today BlackRock announced that it has been commissioned by Bank of America to oversee more than $85 billion in customer money market allocations bringing the firm’s total cash management assets to more than $370 billion. The move comes as more banks leave the cash management sector as low central bank rates make the business unprofitable for firms without sufficient scale.

Avago wins EU approval for acquisition. media reports today emerged indicating that the European Union’s antitrust commission has approved the $37 billion merger of U.S. chipmakers Avago Technologies, based in San Jose, California, and Broadcom Corp., headquartered in Irvine, California, clearing the way for the combined company to retain a dominant position in the region’s smartphone market. The agreement to merge was first announced in May of this year and is expected to close by the first quarter of 2016.

China targets slower GDP pace. Official state media outlet Xinhua quoted Chinese President Xi Jinping on Tuesday saying that the nation’s economy must maintain a GDP pace of 6.5 percent in order to achieve its long-term growth target. The comments echo a speech delivered on Sunday by Premier Li Keqiang that stressed a five-year plan to achieve higher living standards.

UBS earnings surprise to upside. Third-quarter earnings announced by Swiss financial services giant UBS Group featured a rebound in the firm’s investment banking division that includes a 10 percent year-over-year gain in equity-trading revenues. Pre-tax profits for the period topped $500 million, significantly higher than analysts consensus estimates, with aggressive expense cuts boosting margins. UBS has aggressively poached investment-banking talent from rivals so far this year as other European banks scale back trading operations. Separately London-based bank Standard Chartered announced a surprise loss of $139 million for the three months ending in September.

Portfolio Perspective: Tide Turning in Emerging MarketsPeter Sullivan, HSBC

The prevailing trend over the past year has been for international investors to sell emerging-markets equities but we have seen a couple of weeks of inflows. Could this continue? We believe there is a good chance because fund holdings are lower than many believe.

Fund holdings in emerging markets are difficult to interpret because they are an amalgam of two groups: funds with a global benchmark that includes emerging markets and funds with a developed-markets benchmark, such as MSCI World or EAFE. Funds with global benchmarks are underweight emerging markets and have ample scope to increase weightings.

However, funds with developed-markets benchmarks also have holdings in emerging markets and are by definition always overweight. The key question is whether these funds with off-benchmark positions in emerging markets will ever go back to a zero weighting. We cannot give a definitive answer but we believe this is highly unlikely. We see no evidence that they are behaving any differently to funds with truly global benchmarks. In fact their weighting in emerging markets has increased over the past two months.

Our conclusion is that fund holdings in emerging markets are lower than they appear at first sight and there is scope for the recent buying to continue. Taiwan is a market with relatively low holdings, where weightings have begun to increase.

Peter Sullivan is a strategist for HSBC Bank in London.

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