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Why the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) looks poised to finish the year on a high

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Don’t let today’s market rally fool you. I believe we aren’t out of the woods yet and the latest market sell-off isn’t over. But this doesn’t mean we won’t end the calendar year on a high.

The surge in mergers and acquisitions (M&As) to the highest level in seven years is adding confidence to my upbeat call and a big pipeline of deals means we are likely to see a very active December quarter.

Data from Dealogic showed inbound and domestic M&As have doubled from last year to US$79.4 billion – and that’s the most since 2011, according to the Australian Financial Review.

This is a bullish indicator for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO), which is trading 0.4% higher this morning but is still down by over 3% in the past two weeks.

The interest in M&A reflects a strong appetite from investors for risk assets and that means any market pullback will be relatively short-lived.

But as I mentioned, I think we still have a little more to go before the market turns higher in October or November and the uptrend should run through to early 2019. I hope investors are cashed up to take advantage of the market dip.

What’s more, there M&A value may still rise further as we aren’t at year-end just yet and there are already some mega deals that have been announced and not completed.

This includes the sale of pipeline owner APA Group (ASX: APA) and the Transurban Group (ASX: TCL) led acquisition of a 51% stake in Sydney’s WestConnex tollway.

Let’s also not forget the high-profile “merger of equals” between TPG Telecom Ltd (ASX: TPM) and Vodafone Australia, and the more controversial takeover of Fairfax Media Limited (ASX: FXJ) and Nine Entertainment Co Holdings Ltd (ASX: NEC).

We might also see some new M&A deals being done in the mining sector, particularly in the mid to small end of the market, as that’s another area that experts believe is ripe for transactions.

The weakening Australian dollar and relatively strong share prices are two tailwinds that could drive further growth in M&A in Australia as the currency makes our assets cheaper to an overseas buyer while a buoyant share price will make scrip-based takeovers easier to justify to shareholders.

It also helps that many of our biggest companies, including Commonwealth Bank of Australia (CBA) and Suncorp Group Ltd (ASX: SUN), are looking to sell assets to focus on their core businesses; while cashed-up and eager buyers struggling to generate growth are willing to entertain deals.

With this frenzy of activity, we aren’t likely to fall into a bear market in the near-term although the volatile political environment here and abroad means the bulls can’t afford to be complacent either.

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Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited. The Motley Fool Australia owns shares of and has recommended TPG Telecom Limited and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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