Shell's megamerger deal is no reason to panic

History has not judged megamergers kindly. Of the 10 biggest, five took place shortly before the bursting of the dotcom bubble, including Vodafone's notorious acquisition of Mannesmann. Another three were in the late stages of the pre-Lehman boom, notably the purchase of ABN Amro by a Royal Bank of Scotland-led consortium - perhaps the dumbest deal of all time.

Shell's £55bn deal for BG Group on Wednesday ranks as the ninth-biggest in that list, according to Dealogic. So, should shareholders be concerned that the return of the titanic takeover means equities are toppy?

Start with the past. It is no coincidence that the really big deals happen when the market is frothy. The logic is the same as that behind the world's tallest towers: investors and lenders are willing to countenance such financial nonsense as the Burj Khalifa, or London's Shard, or AOL-Time Warner only when they are overly complacent.

Shares already look toppy. US equities have been more expensive on price to forward earnings only in the dotcom bubble and its aftermath. On the longer-term Shiller measure, of price to 10 years of earnings, US shares have been more expensive than now only in the dotcom era and 1929.

The boom in European markets this year means the eurozone is only just behind the US in terms of forward PE. Astonishingly, the median European stock is more expensive than in the US, as Andrew Lapthorne at Societe Generale points out.

Yet Shell's deal is no reason for panic. There is hardly an excess of enthusiasm in oil and gas. Rather than a chief executive's flight of fancy, it looks as though Shell is trying a spot of bottom-fishing: at the start of this year, BG shares had almost halved since 2011. The total value of European deals does not look excessive, either (see chart).

Equally, European valuations can be defended. Profits are depressed so, if Europe is recovering - to be fair, a big if - then valuations will look fine as earnings rebound.

There is no such excuse for US valuations, with shares at a high multiple of extremely high profits. With bond yields depressed, shares can be said to look relatively appealing. But such an apology for stocks works only as long as central banks keep offering easy money.

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