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Financial Credit Opportunities in the M&Aking?

July 1, 2025

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With global M&A activity in 2025 more steady than spectacular, European Banks stand out. And where do resource equities fit in a portfolio?

In M&A land, the Trump-inspired, deal-making bonanza has yet to materialise, as we highlight here. But one sector that is in scintillating form is European Banks.

All the key ingredients are there:

  • Large players sitting on excess capital after a number of years feasting on elevated interest rates
  • Regulators keen to see their banks deploy their dry powder to become larger, stronger and multinational in order to compete with the US‘s improved financial stability
  • Multiple jurisidictions which appear ripe for consolidation. Italy, Germany, Poland, France and the UK look particularly open to M&A in our view

Italian banking is going through an M&A spree, with five of the eight largest institutions involved in potential deals. The French banking giant, Credit Mutuel, recently acquired Germany’s Oldenburgische Landesbank, while a deal for BPCE to take a 75% equity interest in Portugal’s Novo Banco is currently underway. In Spain, BBVA’s proposed purchase of Banco Sabadell remains in the balance.

Consolidation can provide opportunities for the active credit investor, as debt issued by smaller issuers may often benefit from the backing of a larger, higher credit quality, parent. Take the recently announced deal from Belgian group, KBC, to purchase the majority stake in Slovakia’s 365.bank, building its presence in Central and Eastern Europe. The Slovakian financial’s credit spread halved in the days following the announcement.

Figure 1. Acquisition by a high-quality institution creates tidy spread compression for 365.bank

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Source: Man Group, Bloomberg, TSFBNK 7 1/8 07/04/28 bond spread to benchmark, as of 20 June 2025.

Viva la fiesta

In our view, this trend looks set to continue. There are thousands of banks in Germany split across its three-pillar system (public, private and co-operative), although regulation and politics might prevent mega mergers. Whilst the UK and France are dominated by a handful of key players, there is a long tail of smaller, challenger firms across both countries which could be profitable bolt-ons. Poland and Italy sit in the middle, with a number of national champions coupled with hundreds of smaller entities that could be prime takeover candidates.

Whilst the rest of the world waits for the M&A festival to begin, European financials, often the wallflower to their brash American counterparts, are getting the party started early this time.

 

Authors: Alan Bowe, Portfolio Manager, and Jon Lahraoui, Director, Credit, Discretionary.

Geopolitical shifts are driving resources stocks. But in what direction?

Recent global industrial expansion has been associated with accelerated demand for commodities such as copper, silver, uranium, natural gas and lithium. For investors who don’t have the stomach for the volatility of straight-up commodities, resource stocks can provide a bridge between equity income and commodity-linked returns, while also maintaining low long-term correlations to both stocks and bonds.

However, clients often ask us where this essentially hybrid asset class fits into their portfolio and what role it performs. In what follows, we share four possibilities.

  1. Riding the megatrends
    Natural resources are exposed to several megatrends such as decarbonisation, geopolitical fragmentation, the emergence of artificial intelligence (AI), energy innovation and resource scarcity. Each of these contains smaller sub-themes like nuclear power in decarbonisation, next-generation battery materials in energy innovation, water volatility within resource scarcity and the future of the grid in powering AI. The list goes on and on; in fact, natural resources are so integral to our everyday economy that it is difficult to imagine future developments that don’t affect this investment universe in some way.

    When making thematic investments, two factors are critical: selecting resource stocks with meaningful exposure to the theme and pinpointing which parts of the value chain stand to benefit most.
  2. Real assets: liquidity boon
    Resource equities have been increasingly treated as part of real asset allocations, alongside infrastructure and real estate. Their liquidity, efficiency and dividend yield set them apart from more traditional real assets. This hybrid instrument combines many of the best aspects of real assets with listed equities. During periods of distress and volatility in the broader markets, listed equities can be more volatile than private real assets, likely owing to their liquidity. However, we note that the underlying fundamental businesses are impacted the same way, whether listed or private.
  3. Inflation/stagflation hedge
    Inflation protection has driven significant investor interest since the 2021/2022 inflation spikes. Some investors entered that period with a substantial technology overweight and were caught flat-footed when central banks hiked interest rates. One of the few asset classes that delivered meaningful returns during that period were commodities and natural resource equities. While the inflation picture has since improved, structural factors keep many investors concerned about an inflation rebound or stagflation.

    Figure 2. Natural resources can serve as a hedge against inflation

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    Source. Annualised data. Bloomberg, as of 31 December, 2024.

  4. The alternatives
    In a post-60/40 world, alternative investments have gained traction. Given their low correlation, as well as alpha generation potential, resource equities are emerging as an alternative asset class. Investors increasingly view them as a hedge against geopolitical risks, as well as a hedge against other long positions in their portfolio (but without short-selling or buying derivatives). The investment case is bolstered by their liquidity characteristics, long-only listed equity structure and competitive fee arrangement.
 

Authors: Albert Chu, Portfolio Manager, Natural Resources, and Nick Wilcox, Managing Director, Discretionary Equities.

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