Expectations of a strong recovery in 2021 – and progress in fighting Covid-19 – mean that the fundamental outlook has improved. But while the outlooks for next year strike a positive note, it is important to think about any risks lurking under the surface.
We will cover one of these risks every week until the end of the year. The first is the potential change in corporate behaviour amid these better conditions. This year has been a positive one for corporate behaviour: companies cut shareholder returns, the number of leveraged buyouts fell and there was little merger and acquisition (M&A) activity to impair credit profiles (see figure 1).
Figure 1. M&A activity is down
Source: Bloomberg, as at November 2020.
As news of potential Covid-19 vaccines provided a shot in the arm, global funding rates for corporates are near all-time lows. This, combined with the capital sitting on the sidelines in the private-equity universe and the likely improvement in the fundamental outlook, mean that corporate behaviour could be less optimal next year.
Nature abhors a vacuum and we expect the focus to shift from balancing default risk and the reach for yield to navigating stormier waters as corporate increasingly take advantage of favourable market conditions.