2020 M&A Forecast - Economic outlook for 2020

The economic backdrop for M&A is positive,
but conflicted. The world is still awash with easy
money, but valuations are high and economic
momentum is easing.

Weight of money globally provides a positive backdrop to
deal-making. A protracted period of very low interest rates
and quantitative easing by several advanced economies
has unleased massive amounts of capital — both from
cheap debt and investors hunting for better returns. A third
of investment grade bonds now have negative yields, so
this is not surprising. It means there’s still a lot of capital
chasing returns and looking to make deals.

However, the economic backdrop is less rosy than in
recent years. This is in large part due to the simmering
US-China trade war; its fallout on other economies
which are entangled through complex supply chains;
and maturing economic cycles more generally.

In New Zealand, the economy has been slowing since
mid-2017. It’s growing at a reasonable pace, better than
most peer countries, but still slower than in recent years.
A recession is possible, but not likely. It would need some
kind of catalyst: a severe drought in New Zealand or
worsening global economic and financial conditions.
Throughout the expansion phase of the past decade,
following the Global Financial Crisis (GFC), the cycle has
felt different. It has been characterised by relatively
slow growth, unusually low wage and price inflation and
interest rates never returned to what we considered
‘normal’ before the GFC.

Instead a new normal has set in: a combination of low
growth, low inflation and low interest rates. We have not
seen such a combination sustained in living memory. This
combination appears likely to last for many years to come.

Structurally low interest rates coincide with a
demographic surge of Baby Boomers hitting retirement.
They will switch from saving for retirement and running
businesses, to investing in retirement and exiting their
privately held businesses. Very low interest rates are likely
to support both aggressive demand for risky assets and
a supply of new businesses into the market. The impact
on valuations is hard to decipher, but deal activity looks
structurally underpinned.

Recent regulatory changes for New Zealand banks will see
them hold more capital and change their lending behaviour.
It will make banks more cautious in their lending to farms
and businesses, meaning previously bank debt-funded deals
may now enter the wider deal making space.

The New Zealand economy is losing steam gently.
The Reserve Bank of New Zealand has cut interest rates,
but at current very low interest rates, these changes
are having little impact. The main tool to manage the
economy is now fiscal policy, but there’s unlikely to be
a big boost until 2021, after the election in late 2020.
But when that happens, the scope is positive. By global
comparisons, New Zealand has a very strong fiscal
position and a long list of projects that will make the
economy go faster.

The New Zealand economy will be rudderless in 2020.
Monetary policy isn’t getting traction and fiscal stimulus
is far away. Combined with slowing growth at home,
growing global economic and geopolitical risks, and little
prospect of effective economic stimulus, deal-making
may prove a little harder in 2020, but the long-term
outlook is very positive.

Foreword by Shamubeel Eaqub; Economist, author and commentator.

Read the Full Merger and Acquisition Forecast

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