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10 Trends That Will Drive Decision-Making in 2021

While 2020 left us with uncertainty and an uneven recovery, 2021 may be the year for action. J.P. Morgan’s Corporate Finance Advisory outlines the 10 striking facts that will help drive companies’ decision-making.

February 17, 2021

1

COVID-19 Recovery Won’t Be a Global Synchronization, Unlike the Downturn

In contrast to global synchronized growth of the recent past, COVID-19 has driven a wave of synchronized global recessions. However, the recovery is expected to be uneven with countries and U.S. states trending differently. Millions might be tipped back into poverty and financial distress could trigger defaults in developed and developing markets, offering additional challenges to business plans and financial results.

Infograph 1 Over 90% of the world’s economies went into recession during 2020, the greatest synchronized global economic slowdown of the last 150 years. Source: The World Bank

2

Unemployment Trends Vary, But a New Business Boom Emerges

While the overall U.S. unemployment rate has shifted back toward historic norms, the unemployment rate for minorities, the less educated, and the young is still more than double the college-educated rate. The uneven recovery in employment is likely to have longer-term ramifications for economic growth and consumer sentiment. However, a record number of entrepreneurs — more than 1 million — sought out new business applications in 2020, signaling the potential for a new wave of innovation.

Source: U.S. Bureau of Labor Statistics

1 million business aplications in 2020 1 million new business applications in 2020

3

Mixed Recovery for U.S. Firms, But Strong Cash Positions Lower Uncertainty

In 2021, nearly two-thirds of S&P 500 firms are expected recover to 2019 earnings-per-share levels, a potentially conservative estimate based on recent trends of firms substantially outperforming analyst expectations. While smaller firms are expected to recover more slowly, firms of all sizes have bolstered cash on balance sheet to levels not seen in over 50 years. Strong and affordable access to capital markets has been a critical factor behind the increased corporate liquidity.

40.0% 35.0% 30.0% 2.0% 4.2% 6.4% 8.6% 10.8% 13.0% 15.2% 25.0% 20.0% 15.0% 5.0% Source: Federal Reserve Cash / Assets Cash / (Debt + Loans) U.S. non financial corporate business cash over time Data as of: 12/21/2020 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 17.7% 32.5%

4

Debt Markets Rebound at Record Pace

Active policies by central banks have helped to facilitate a rapid recovery of debt markets. The recovery of spreads has led to high levels of Investment Grade (IG) and High Yield debt issuances. The rise of zero- or negative-yielding corporate debt globally has made the U.S. IG market essentially the only place to find yield underpinned by strong credit quality. This supports the likely continued strength of the market, with attendant benefits to the U.S. economy also likely.

Nearly 90% of IG fixed income instruments that yield more than 2% are in the USD market. 90% of IG fixed income instruments that yield more than 2% are in the USD market. Nearly

5

Rating Agencies Took Action

Throughout 2020, Moody’s and S&P took several ratings actions to reflect market dynamics, with the vast majority impacting non-IG firms. While S&P has issued more downgrades (7.4x) than Moody’s (4.8x), the overall result is that ratings between agencies are now more aligned. While High Yield firms have taken the brunt of ratings actions, the debt capital markets have remained supportive.

Since March, the rating agencies have issued 6x more downgrades than upgrades, with 91% in the High Yield space. 6x more downgrades than upgrades, with 91% in the High Yield space. Since March, the rating agencies have issued

6

Equity Markets Show Resilience

Equity market performance has been extraordinarily strong despite the pandemic, with even smaller firms recouping their losses — and then some — by the end of 2020. Equity market strength has supported an explosion of issuance, including record IPO activity dominated by SPAC listings, and there is potential for additional upside in 2021.

Group 25 Created with Sketch. 55% higher than the previous record in 2014 2020 U.S. equity issuances were
62% higher than the previous peak in 2000 2020 IPO activity was
Source: Dealogic $0 $50 $100 $150 $200 $250 $300 $350 $400 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Non-SPAC IPO ($bn) SPAC IPO ($bn) Direct listing 2020 U.S. equity issuance ($bn) Folow-on ($bn) $393 $175 $181 $186 $160 $203 $265 $237 $161 $215 $167 $214 $181 $136 $131 $127 $189 $205 $133 $91 $77 $127 $120 $130

7

Energy Transition and ESG Interest Accelerate

With pressure building on fossil fuel companies to embrace and adapt to the energy transition, 2020 saw market caps of Power & Renewables companies surpass those of Oil & Gas companies. Additionally, ESG-oriented bond markets issuance increased by 62% in 2020, the largest dollar increase to date. The unwavering focus on ESG and energy throughout pandemic-induced volatility illustrates the resiliency of the trend.

Source: Bloomberg

8

Retail Investors Drive Momentum in High-Growth Firms

The stereotype of the retail investor as the passive income-oriented retiree was challenged in 2020, as low-cost trading platforms and stay-at-home orders manifested as a large-pick-up in retail investment —particularly in high-growth firms, this retail investor trend likely helped contribute to the outperformance of growth-oriented firms through 2020, in contrast to the Global Financial Crisis when long-term dividend payers were one of the best-performing equity groups within the S&P 500.

Retail ownership in high-growth companies was up nearly 30% in 2020. 30% in 2020 Retail ownership in high-growth companies was up nearly Source: Refinitiv Eikon

9

Delivering Growth Becomes Harder, but Investor Interest Expands

Factors supporting growth (e.g., lower taxes, higher margins) are facing headwinds and organic investments have steadily declined across the market over the last several decades. Investor interest in is growth increasing, but opportunities are more limited. This has caused the relative value of growth in the market to reach multi-decade highs: 160% higher than the past 20 years. The longstanding trend of high-growth firms receiving outsized valuation premiums was evident even prior to COVID-19, and could persist throughout the recovery.

0 2 4 6 8 10 3.4x 3.1x 2.1x 4.5x 3.8x 3.6x 3.0x 3.5x 0.4x 2.0x 2.9x 2.2x 2.8x 3.5x 3.1x 3.3x 2.5x 3.9x 3.5x 6.8x 5.9x 8.4x 9.0x 2000 2001 20 0 2 20 0 3 2004 2005 2006 2008 2009 2010 2011 2012 2013 20 1 4 2015 2016 20 1 7 2018 20 1 9 20 0 7 C ur r e n t 2 0 20 T r oug h 2 0 20 9.1x 9.9x 8.5x 9.9x 9.7x 9.1x 9.3x 8.7x 6.5x 7.9x 7.9x 7.5x 8.2x 9.9x 10.5x 10.1x 10.9x 1 1.8x 10.6x 12.8x 9.6x 14.0x 14.6x Median multiple Relative Value Of GrowthMedian EV/NTM EBITDA * as of 03/23/20Note: Current as of 01/22/21 Source: FactSet

10

M&A May Be the Great Equalizer

M&A activity is being driven by market underperformers more than ever as firms seek paths to growth, efficiency and resiliency. Regardless of inequalities highlighted by the pandemic in terms of recovery, employment, and market performance, M&A strategies have remained attractive for just as many market underperformers as outperformers. Despite a volatile year that saw all-time high VIX levels, M&A activity was comparable to other non-recessionary years during the past two decades — and may be the great equalizer that can boost recovery regardless of size, scale, or past performance.

The Corporate Finance Advisory team examines themes or trends that serve as a source of thought-leadership for management teams. Areas covered traditionally include corporate strategy and M&A, capital markets, capital structure/allocation, market intelligence, or other accounting and regulatory subject matter.

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