Global deal makers predicted close to double-digit growth for capital markets in 2022. But with rising volatility, inflation and interest rates, the relative attractiveness of capital types has become much more uncertain.
- Earlier in the year deal makers had been optimistic about capital markets. However, geopolitical events will test that bullishness for capital market growth in 2022.
- Before the conflict in Ukraine, sentiment among deal makers was weakest in EMEA.
- The primary demand drivers for capital growth remain valid: diversification, business continuity, and liquidity.
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Most deal makers went into 2022 feeling particularly bullish about the prospects for global capital markets. Many of the reasons for that positive sentiment won’t have completely vanished, even if they are now obscured by the ‘fog of war’ that has descended in the past month or so.
Of the 471 deal makers we interviewed during the winter of 2021/2022, just 6 percent and 7 percent predicted a retraction in debt and equity markets, respectively. Compare that with 2019, the last year of the ‘old normal’, when a quarter of respondents were debt market bears and more than one-fifth were bearish on equity markets.
The average predicted growth rate for this year was similarly positive: an increase of 8.2 percent for equities and 8.6 percent for debt markets – and that is on the back of record years for both markets, topping $1trn in equity and $10trn in debt issuance respectively in 2021.
Capital markets professionals had also predicted a return to fundamental market drivers: company and investor-related considerations would occupy the equity markets, they said, and economic factors – above all interest rates – would determine debt markets.
This may still turn out to be the case.
Equity market professionals were also sanguine about COVID-19 and vaccines, with deal makers mentioning these in very low numbers in reference to 2022.
But the unfortunate miscalculation, at least for the year so far, was geo-politics, whereby those considering this to be a major influencing factor for equities fell from 15 percent last year to just 7 percent.
All this begs the question, what now? Well, there are clues in the details.
EMEA dislocation or contagion?
For one thing, despite the positive predictions overall, EMEA was something of an outlier in the survey, with markedly lower positive sentiment across the board. While Asian and American equities were expected to push near or beyond double-figure growth rates during 2022, EMEA averaged just 4 percent, and it similarly trailed in debt market expectations.
Now, with the outbreak of hostilities in Ukraine, this marginally positive sentiment will be put to the test. Whether this means a further dislocation in performance for EMEA, or whether the situation becomes globally contagious, it is likely that local players will bear the brunt to a significant degree.
More broadly positive sentiment around new listings is being put to the test. While it’s too early to call, the big talking point of last year – SPACs or IPOs – has changed very quickly, with SPAC raising declining and poor stock market performance – including tech stocks – putting a dampener on the prospects for new flotations.
Demand in capital markets will still pull
On the other hand, markets are made not just by demand-push, but also by supply-pull.
One UK-based respondent concisely summed up the predicted drivers of new equity issuance for 2022: “Business continuity, need for capital, long-term goals, need for better infrastructure and loss recovery.” Such needs are unlikely to have changed much.
For debt markets, this is even more the case. Business continuity funds are seen as a key driver for company debt-issuance.
As a Korea-based investment banker put it: “Due to the global recession caused by the pandemic, companies are in dire need of capital. Most of these companies are turning towards debt financing because through loans they can instantly raise capital for their business.”
While it’s easy to get distracted by immediate calamity, the situation for many businesses when it comes to the need to raise capital has not changed and may now be even greater. In that sense, deal makers’ predictions at the end of last year remain valid.
How this plays out on the demand side – whether rising inflation pushes investors towards equities, or rising volatility pushes them back towards bonds – is a tougher call.
One way or another, the need for capital is real and betting against the sober judgement of the global deal-making community as we went into 2022 may be the riskiest play of all.