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Key Challenges Facing Corporate Decision-Makers In 2022

The top themes and latest data that will help inform decision-making this year, from inflation levels and ESG trends, to the cryptocurrency craze, company spin-offs and more.

February 17, 2022

Companies are generally starting 2022 from a strong position with solid margins, improved balance sheets and excellent liquidity. Though markets are active and supportive of capital raising at low costs, 2022 will likely deliver unique challenges for corporate decision-makers including elevated inflation, higher-cost of borrowing, labor shortages and more.

In its annual collection of the key trends expected to gain significant traction in the new year, J.P. Morgan’s Corporate Finance Advisory identified 10 striking facts that should be top-of-mind for corporate decision-makers.

Commodity prices, supply chain disruptions and economic stimulus have pushed inflation to the highest level since 1982, reaching 7.0% in December 2021. However, as businesses passed higher costs to customers, corporate profit margins stayed strong, hitting 14.8% in Q3 2021. This is their highest level since 1950. With most management teams lacking experience operating in inflationary environments, such high levels could hinder growth prospects.

Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research; Bureau of Economic Analysis

U.S. employees are quitting their jobs at the highest rate in decades by far, reaching 3% at the end of 2021 and smaller firms being the most impacted by the “Great Resignation.” While nearly all sectors have experienced an increase in quit rates, smaller firms (less than 5,000 employees) have been disproportionally affected by the “great resignation” with quit rates reaching as high as 3.8% in November 2021, compared to 1.3% for firms with 5,000+ employees. Drivers behind the mass exodus include higher compensation, flexible work arrangements and perceived lower risk opportunities. Firms will need to compete to replace employees who left, with nominal wages up ~5% over the last year.

Source: U.S. Bureau of Labor Statistics

Despite concerns of rapidly rising rates this year, U.S. Treasuries have returned to pre-COVID levels, and even those levels are low relative to other points in time. The S&P 500 real earnings yield of negative 3% in December 2021 is at the lowest level in over 70 years. Estimates continue to imply a strong economic growth outlook, but a key question remains: will negative real earnings yields on the S&P 500 be sustainable, or do markets risk a sell-off in the absence of inflation moderation?

Equity and rate forecasts

Source: Bloomberg, Equity Research as of 12/31/2021
Note: S&P 500 '22E estimate based on median of median of 10 banks that provide year-end forecasts

High Yield (HY) represented 25% of U.S. bond issuances, up from 21% in 2020. Debt capital markets investors continue to be supportive, especially with 2021 returns on HY bonds exceeding those on Investment Grade bonds. Firms are taking advantage of a more normalized environment to refinance debt and de-lever, particularly “COVID debt” that was raised to provide liquidity in Q2 2020, while EBITDA normalizes for most companies. In 2021, one of every four dollars of capital raised in the U.S. bond markets in 2021 was from a HY issuer.

U.S. bond issuance over time ($bn)

Sources: J.P. Morgan Corporate Finance Advisory, J.P. Morgan DataQuery

2021 Leveraged Buyout (LBO) transaction volumes are more than 2x the long-term average and at the highest levels in more than a decade. Strong capital markets have supported this boom, with High Yield investors maintaining an appetite for highly levered transactions. Sponsors and private companies are taking advantage of a strong market, with the proportion of U.S. acquisitions involving a sponsor increasing 164% and those involving a private target increasing 75% vs. the average over the last 15 years.

U.S. LBO transaction deal value ($bn)

Source: Dealogic as of 12/31/2021 Note: based on deal announcement date

The valuation premium for growth in equity markets remains at multi-decade highs, though not equal across sectors, and is challenging business strategies at levels not seen in decades. For firms in sectors where growth is being highly valued, increasing investment – organic and inorganic – will likely continue to be rewarded. Health Care, Communication Services and ESG Leaders are the top three sectors expected to receive the most valuation premium for growth. For firms in sectors that are receiving less credit for growth, highlighting high-growth subsidiaries in adjacent sectors, such as technology or energy transition, may offer a path to value maximization.

Sources: J.P. Morgan Corporate Finance Advisory, MSCI

As firms seek value for high-growth subsidiaries or place more focus on their core segments, the frequency of spin-offs has increased to a near-record pace. Several high-profile business separations in 2021 are piquing investor interest as a strategy, particularly for companies with segments that may be considered non-core or have materially different growth rates. The spin-off trend is likely to continue due to precedent business separations creating value for shareholders.

Sources: J.P. Morgan Corporate Finance Advisory, MSCI

The policy landscape is rapidly evolving as global governments accelerate their actions to address climate objectives. Alongside this, shareholders have become more supportive of climate-related proposals. In fact, one-third of climate-related U.S. shareholder proposals received majority support from investors in 2021. Boards view ESG factors as key value drivers, which is supported by premium valuations for companies with strong ESG credentials.

Do boards consider "ESG" to be a value driver?

Sources: J.P. Morgan Corporate Finance Advisory, FactSet financial data and analytics

High Yield (HY) represented 25% of U.S. bond issuances, up from 21% in 2020. Debt capital markets investors continue to be supportive, especially with 2021 returns on HY bonds exceeding those on Investment Grade bonds. Firms are taking advantage of a more normalized environment to refinance debt and de-lever, particularly “COVID debt” that was raised to provide liquidity in Q2 2020, while EBITDA normalizes for most companies. In 2021, one of every four dollars of capital raised in the U.S. bond markets in 2021 was from a HY issuer.

Sources: J.P. Morgan Corporate Finance Advisory, FactSet financial data and analytics

High Yield (HY) represented 25% of U.S. bond issuances, up from 21% in 2020. Debt capital markets investors continue to be supportive, especially with 2021 returns on HY bonds exceeding those on Investment Grade bonds. Firms are taking advantage of a more normalized environment to refinance debt and de-lever, particularly “COVID debt” that was raised to provide liquidity in Q2 2020, while EBITDA normalizes for most companies. In 2021, one of every four dollars of capital raised in the U.S. bond markets in 2021 was from a HY issuer.

Sources: J.P. Morgan Corporate Finance Advisory, FactSet financial data and analytics

The total market cap of Cryptocurrency increased 1,252% between December 2019 and December 2021, making it nearly 1.5x the size of the High Yield bond market. While the price appreciation and volatility of Bitcoin has garnered attention, a more significant consideration for firms is the continued revolution in distributed ledger and payments technology. Cryptocurrency as an investment has also become more popular, but the significant volatility remains a barrier for many investors and corporate use cases.

Market Cap of Select Asset Classes ($tn)

Sources: Bloomberg, Infinite Market Cap, CoinMarketCap

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