Despite a challenging global economy and geopolitical landscape, the outlook for deal-making, IPOs, and corporate and investor activity is expected to improve in 2024, according to Jim Esposito, Dan Dees, and Ashok Varadhan, the co-heads of Goldman Sachs’ Global Banking & Markets business.
In some respects, economic conditions are expected to return to the pre-pandemic normal after the whiplash caused by Covid-19 and governments’ response to it, Varadhan said in an episode of the Goldman Sachs Exchanges podcast. He points out that a 25-year-economic-cycle was “crammed into three-and-a-half years”: Covid outbreaks and subsequent lockdowns caused an abrupt shock in many economies, which was followed by dramatic monetary easing and unprecedented amounts of fiscal stimulus. The rapid development of a vaccine helped spark a robust economic recovery, so much so that supply chains couldn’t keep up, fueling the highest level of inflation in four decades.
“It’s just been so much for the markets to digest,” Varadhan says. But while the global economy is emerging from that turmoil, not everything will be as it was before. The ongoing backlash to globalization, for instance, will not necessarily diminish. There are signs of less global cooperation and more polarization, which may not normalize anytime soon.
US inflation, meanwhile, has dropped from 8% to 3% over the past year, as the Federal Reserve has aggressively hiked interest rates. Varadhan argues that policy is now too restrictive and that short-term rates will “have a chance to come down” over the next couple of years. But longer-term interest rates may not follow — at least not meaningfully — due to structural factors such as mounting government debt and a lack of political will to cut spending or raise taxes.
As bond yields have risen, Esposito notes there’s less demand for longer-maturity US Treasuries than there was just six months ago. Major central have moved from buying government bonds to selling them. US regional banks have been major buyers of Treasuries, but they’ve been snagged by a mismatch in duration in their holdings of those securities (some regional banks had substantial holdings of long-term Treasuries funded with short-term deposits) and, as a result, have been less active in recent Treasury auctions. Further, investors can get a higher yield from a six-month Treasury bill than they can from a long bond.
“The demand side is creating a bit of a supply-demand imbalance right now that we need to keep a proper eye on,” Esposito says
IPO activity, which started to pick up in recent months, should accelerate in the back half of 2024, especially if the Fed starts cutting rates next year, Dees says. He notes that it’s not unusual for the IPO market to open and close. When financial markets are strong, public offerings tend to be robust, and vice versa.
In addition, the spike in interest rates has left markets somewhat “discombobulated” — particularly when it comes to growth stocks and therefore for IPOs, Dees says. Eventually, however, IPOs are going to rebound because of the need for funding.
“The environment for capital raising will be very robust — because it has to be, in the years ahead,” he says. “We are in the age of innovation, of accelerating innovation. All that innovation needs to be funded.”
Financial sponsors — typically private equity firms involved in leveraged buyouts — are facing much higher borrowing costs than they were 18 months ago. Though activity from those clients has cooled, Dees expects some reacceleration in the near future. “As they get their head around this new cost of capital, and how to think about the required equity returns in the context of that new cost of capital, that’ll sort itself out, and you’ll see a reengagement of activity,” he says.
As for company activity, that may well speed up as CEOs gain confidence that a soft landing for the economy is at hand, Dees says. “You’ll see a bigger pick-up in that activity and more strategic activity from the corporate side as well.”
PE deals will probably return to normal, after witnessing a level that was “off the charts” last year, Esposito says. PE firms accounted for almost 40% of global merger volume in 2023, about double their share from a decade ago. Much of that activity was taking advantage of still-low interest rates.
Companies and strategic buyers may very well “step in and fill the void, some of which is being left from private equity,” Esposito says. That’s a reversal from the last decade, when PE often made the highest bid for assets. “Corporates in some places were getting priced out of the market,” he says.
“We expect a pickup in deal-making as we get into 2024,” Esposito adds. “We’re not going back to, say, 2021 levels, which was a breakout year across global investment banking. But we do expect to see a reasonable pickup in deal-making activity, especially now that we seem to be through the other side of this interest rate hiking cycle.”
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