Original Release Date November 15, 2024: Our head of Corporate
Credit Research Andrew Sheets explains why a stronger economy,
moderate inflation and future rate cuts could prompt deal-making.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, head of
Corporate Credit Research at Morgan Stanley. Today I’ll discuss
why we remain believers in a large, sustained uptick in corporate
activity.
It's Friday, November 15th at 2pm in London.
We continue to think that 2024 will mark the start of a
significant, multiyear uplift in global merger and acquisition
activity – or M&A. In new work out this week, we are
reiterating that view. While the 25 percent rise in volumes this
year is actually somewhat short of our original expectations from
March, the core drivers of a large and sustained increase in
activity, in our view, remain intact.
Those drivers remain multiple. Current levels of global M&A
volumes are still unusually low relative to their own historical
trend or the broader strength that we see in stock markets. The
overall economy, which often matters for M&A activity, has
been strong, especially in the US, while inflation continues to
moderate and rate cuts have begun. We see motivations for sellers
– from ageing private equity portfolios, maturing venture capital
pipelines, and higher valuations for the median stock. And we see
more factors driving buyers from $4 trillion of private market
"dry powder," to around $7.5 trillion of cash that's sitting idly
on non-financial balance sheets, to wide-open capital markets
that provide the ability to finance deals.
These high level drivers are also confirmed bottom up by boots on
the ground. Our colleagues across Morgan Stanley Equity Research
also see a stronger case for activity – and we polled over 60
global equity teams for their views. While the results vary by
geography and sector, the Morgan Stanley Equity analysts who
cover these sectors in the most depth also see a strong case for
more activity.
The policy backdrop also matters. While activity has risen this
year, one reason it might not have risen as much as we initially
expected was uncertainty about both when central banks would
start cutting rates and the outcome of US elections.
But both of those uncertainties have now, to some extent, waned.
Rate cuts from the Fed, the ECB, and the Bank of England have now
started, while the Red Sweep in US elections could, in our
view, drive more animal spirits. And Europe is an important part
of this story too, as we think the European Union’s new approach
to consolidation could be more supportive for activity. For
investors, an expectation that corporate activity will continue
to rise is, in our view, supportive for Financial equities.
Where could we be wrong? M&A activity does fundamentally
depend on economic and market confidence; and a weaker than
expected economy or weaker than expected equity market would
drive lower than expected volumes. Policy still matters. And
while we view the incoming US administration as more M&A
supportive, that could be misguided – if policy changes dent
corporate confidence or increase inflation.
Finally, we think that a more multipolar world could actually
support more M&A, as there’s a push to create more regional
champions to compete on the global stage. But this could be
incorrect, if those same global frictions disrupt activity or
confidence more generally. Time will tell.
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