As much as we don’t like it, coronavirus can’t simply faint from our sight. As restrictions begin to ease new cases will eventually emerge, and new waves will hit the economies. For example, let us look at Europe: despite the recently initiated vaccination campaigns, the block is still struggling to contain the new wave of the epidemic. As a result, governments reintroduce lockdowns and hit the economy even harder, especially small businesses. In the Netherlands, for instance, 89 percent of the businesses that decided to close last year were self-employed people with no other employees. Many one-man businesses shut down in the trade, IT, and services sectors.
Nevertheless, we, humans, either change and adapt our lives to the new reality or we transform into dust. The first quarter of 2021, for the most part, was quite optimistic for both equity markets and overall recovery. In this context, it shouldn’t be a surprise that OECD predicts much higher growth for the global economy in 2021. The Paris-based international agency said Wednesday the world economy will grow by 5.6% this year, far better than the 4.2% expansion it predicted back in December.
Low borrowing costs, meanwhile, resulted in a massive spike in mergers and acquisitions. According to Reuters, in the first quarter of 2021, deal-making surged in most sectors of the economy, especially the technology industry, which is positioning for big changes in cloud computing and collaboration spurred on by the shift to remote working. In other words, companies and investment firms rushed to get ahead of changes in how people work, shop, trade, and receive healthcare during the COVID-19 pandemic.
The data suggests that almost half the deal activity came from the United States where volumes were up 160% year on year at $654.1 billion. The Asia Pacific region, excluding central Asia, was up 44.9% at $206.5 billion. In Europe, M&A activity was up 24.5% year on year at $277.3 billion, as mega-deals became more difficult to negotiate.
The other side of the coin or recovery was a steep rise in treasury rates. The reason is simple: investors worry about inflation risks. Being optimists, we could expect inflation to pick up, but only temporarily. Not structurally. That is the most important thing to keep in mind. At the same time, we doubt that central banks would risk several of their current ultra-lax monetary policies precisely because they consider that price increases will be transitory (their own estimates indicate this), but also because the risk associated with changing them would not compensate them. Officials at the Federal Reserve, meanwhile, still persist that there is little cause for worry.
At the same time, Aswath Damodaran argues that the Fed has tried everything it can to keep rates from rising, and the very fact that rates have risen, in spite of this effort, is an indication of the limited power it has to set any of the rates that we care about in investing. Additionally, he mentions that the only rate that the Fed directly sets is the Fed Funds rate.
Howbeit, fears haven’t gone, as a result, there was a shift within equity markets, or we could call it a “rotation”. Thus, the winners from last year underperformed the losers in the first quarter. Investors turned their eyes on cyclical stocks instead of expensive techs.
What about the companies that recently went public. First thing first, it is important to mention that the first three months of 2021 registered a record amount of initial public offerings. According to Renaissance Capital, there were 100 IPOs in the first quarter that raised $39.2 billion. That’s the most since the 133 IPOs in the third quarter of 2000, which raised $18.5 billion.
If we include SPACs, the total number spikes to 398. The 298 SPACs raised around $87 billion. In fact, at the current pace, there could be more than 1,000 SPAC IPOs this year. That’s more than double the 486 IPOs in 1999, at the peak of the dot-com mania.
Howbeit, raising money is not the only thing that should be taken into account. The question is, what happened next? Looking at Airbnb stock, we can see that there were some ups and downs since the company went public but overall, they have grown 27%. Bumble, on the other hand, lost over 17% of its initial value. And the reason could lie in the recovery. The first benefit from easing of restrictions, whereas the second actually loses.
In conclusion, it will take years to get back to normal life, but we are on a good track. Vaccination campaigns are gaining traction all over the world, stimulus packages also give a push and it looks like slowly but steadily the business activity recovers. In terms of an investment portfolio, it is important to have a long-term vision. Also, one shouldn’t forget about diversification.
