The consumer cash pile is expected to drive recovery but what about business investment?
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Much is being made of the cash build up that has developed with consumers during the lockdowns and how this may drive a post pandemic economic boom. The forced reduction in spending caused by the closure of large parts of the economy coupled with the financial support for individuals and businesses has left many in the world with increasing savings. Economic forecasters, including the Office of Budget Responsibility (OBR) are now forecasting a stronger economic rebound both from consumers and in business investment. The recent UK budget should provide further support to this with the “super capital allowance” and training and development initiatives.
In addition to the above, the pandemic is creating new opportunities for business arising from structural market changes, the rapid increase of technology adoption and the strides taken in healthcare.
So how are company balance sheets looking as we emerge from the pandemic and is cash available for the investment opportunities for both organic and inorganic growth?
Dealsuite, a platform connecting M&A professionals, released their M&A Monitor H2 2020 recently. This survey found that availability of merger and acquisition (M&A) finance was remarkably stable among its respondents.
One driver of this is company cash reserves. These have held extraordinarily steady throughout the pandemic. The Office of National Statistics (ONS) first started reporting up-to-date data on company cash reserves on 3 May 2020, and since then there has been little change in the reported cash reserves. Clearly the Government’s initiatives and schemes have been effective in helping businesses keep their reserves despite 46% of the same businesses reporting turnover being down on the same period in the prior year.
Fiscal responses to the pandemic continue and recently the US passed a $1.9T stimulus package which will boost the US economy driving global demand and investment. European stimulus has been more focused at providing support directly to employees and credit lines to businesses. It is clear that these fiscal responses, along with central banks’ monetary responses, have kept stock exchanges and credit markets functioning well. Stock markets in the US are at all-time highs, European stocks continue to recover, and investment firms are not having difficulty raising funds.
2021 looks set to see a continued growth of M&A activity. EY reported that 57% of the executives they interviewed were looking at opportunities for M&A activity in the next 12 months. Cross-border deals are a strong driver of this, in 2020 UK companies were involved in 35% of global deals by value. Brexit has contributed to this, as 30% of UK executives have stated that securing supply chains and responding to regulatory and trade changes as deal driver. Germany and France are the UK’s top destination for deals. [1]
Interest in the UK market from overseas investors is also high right now, analysis from Schroders, an asset management company, shows. They put this down to overseas investors viewing cheaper UK company values and a weak pound as an opportunity to buy assets outright.[2]
This optimism for the future comes after a backdrop of M&A almost grinding to halt in first half of 2020 after the first lock down. The Dealsuite M&A Monitor points to a strengthening of demand for M&A activities in the second half of 2020 with the number of assignments increasing compared to the first half.
Dealsuite’s survey of the UK M&A mid-market, gives a good indication of the sectors in which businesses are most interested. It is unsurprising that IT and software companies are a large share of all deals, as businesses seek to adapt to a much more digital world.
Globally we are still living with restrictions, and uncertainty remains about the path back to a new normal, but both consumers and businesses appear ready, and more importantly, able to drive the economic recovery through spending and investment.
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[1] https://www.ey.com/en_gl/ccb/united-kingdom-mergers-acquisitions
[2] https://www.cityam.com/why-are-uk-mid-caps-in-such-an-ma-sweetspot-right-now/