After the unprecedented levels of capital markets activity during 2020 in response to the global pandemic, one could be forgiven for expecting some mean-reversion in 2021. But the world’s deal makers would disagree. On average, the expectation is for further growth in activity, or in the case of M&A, a full recovery. Cornelia Andersson, Head of Banking and Capital Markets, Refinitiv, explains.
- The COVID-19 pandemic has replaced politics as key driver of risk.
- The Americas are notably bullish, while Asia is uncharacteristically cautious.
- Risk appetite and investor sentiment will make or break the year.
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The record-breaking levels of deal-making activity witnessed last year, in response to the global pandemic, will be exceeded in 2021. That is the prediction from more than 460 global M&A and capital markets professionals, interviewed for Refinitiv’s annual Deal Makers Sentiment Survey.
Optimism is particularly high among those based in the Americas (where the speculative phenomenon of special-purpose acquisition vehicles of 2020 appears unabated in early 2021). By contrast, Asia-based respondents are much more cautious about the prospects of deal growth in 2021. EMEA, both literally and figuratively, is somewhere in between.
Indeed, any growth in deal activity is likely to be highly asymmetric. Nowhere is this clearer than looking by sector, where there are expected to be some very clear winners and losers. This would support the wider economic thesis of a so-called ‘K-shaped’ recovery, led by technology and healthcare.
Highlights from the survey include:
External and macro risks
- Pandemic-related concerns are paramount for 77 percent of deal makers.
- Other risks are also compounded: global trade agreements, lacklustre corporate growth, fears of recession and protectionism all tick up.
- Meeting sustainability goals is a major new determinant of activity, cited by 65 percent of respondents.
- Politics falls from the agenda: Brexit mentioned in just 3 percent of interviews; U.S. elections in just 7 percent.
- There is a general move towards local issues, micro-factors, sector-specifics and fundamentals.
M&A in 2021
- Recovery hopes: a 6 percent predicted average growth in global M&A volume for 2021 follows a 5 percent fall in 2020.
- Regional expectations have shifted radically. The Americas’ M&A predictions has risen from 2 percent for 2020 to 8 percent for 2021, while Asia’s has halved from 10 percent to 5 percent.
- COVID-19 is predominantly associated with rising activity, albeit in smaller deals, niche deals, partnership and collaborations, driven by defensive considerations.
- In terms of respondent type, the advisory community is significantly more optimistic about 2021 than it was last year, with a predicted average growth rate of 5 percent, compared with 1.8 percent for 2020.
- Mega-deals: in Asia and EMEA about one-third of deal makers expect growth in large M&A. America is much more optimistic, with nearly half of respondents anticipating a mega-deal renaissance.
- Sector inequality: the two big winners, technology (9.6 percent) and healthcare (8.1 percent) remain dominant in terms of predicted average M&A growth.
Capital raising: Equities in 2021
- Just 10 percent of deal makers expect last year’s bumper crop of equity issuance to deflate. Nearly half expect no change, while the optimists drive the average predicted growth in ECM to 5.9 percent.
- Major regional imbalance of expectations: Americas-based deal makers expect 8.7 percent growth, EMEA expects 4.1 percent, while Asia anticipates just 3.6 percent.
- Risk appetite and investor sentiment is considered the most influential factor affecting equity capital markets in 2021.
Capital raising: Debt in 2021
- Following a record-breaking 2020, deal makers’ growth expectations have risen from 3.4 percent to 6.4 percent.
- As with equities, this disguises large regional variations. The Americas anticipate nearly 9 percent growth, EMEA 6 percent and Asia just over 3 percent.
- The importance of interest rates has diminished relative to the rising risk of loan repayment ability, which rose from 8 percent to 18 percent.
- Risk appetite and government regulation also emerged as factors this year.
- Those expecting revenue growth in 2021 has plummeted from half to less than a third of corporates.
- However, about one-fifth of corporates expect strong revenue growth, pointing to sectoral bifurcation.
Other trends in capital markets
Our survey found another trend to watch for: the goal of meeting sustainability targets is, albeit from a low-base, a fast-growing deal-driver.
If there is a major trend that appears to hold true across all asset-classes, it is a growing preoccupation with local, micro, sectoral and company-specific factors, to detriment of macroeconomic and political ones.
This includes asking questions such as: Will companies be able to service their debt? What are the facts on the ground? How will investors ‘feel’ about a particular offering?
Pre-pandemic preoccupations, such as Brexit and the U.S.-Sino trade wars have been side-lined. Very few respondents (even in the U.S.) so much as mentioned the fact of a presidential election, which was ongoing at the time we conducted the survey.
In 2021, it’s going to be all about your specific context. Whatever that is, I wish you good luck.
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