Despite threats like slowing global growth and trade wars, business is booming in the financial sector. Here's a rundown on the past six months.
June 30, 2019
Good Sunday morning, and welcome to a special edition of the DealBook Briefing where we’ll take a look at how Wall Street and the wider world of finance has performed during the first six months of 2019. (Was this email forwarded to you? Sign up here.)
Jeenah Moon for The New York Times
Success in the face of threat
Reasons for worry are everywhere you look: Slowing economic growth, geopolitical tensions, an escalating trade war and Britain’s effort to exit the European Union.
But business appeared to be booming on Wall Street: Stock markets were back near record highs; big deals were being announced at a near record pace; and Silicon Valley’s most valuable start-ups were marching to the public markets.
Scratch deeper, though, and in some cases you can see signs of concern lurking beneath all that success. Let’s take a look.
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Today’s DealBook Briefing was written by Stephen Grocer in New York and edited by Jamie Condliffe in London.
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A hot half-year for I.P.O.s
After years of waiting, investors have finally gotten an opportunity to own shares in some of Silicon Valley’s most valuable companies.
This year could be among the strongest for tech I.P.O.s. So far, tech companies have raised about $19 billion through initial public offerings on U.S. exchanges, according to the data provider Dealogic. On average, their stocks have gained 34 percent on their first day of trading, the best performance since 2013.
• The two most-hyped offerings, Uber and Lyft, have also turned out to be the biggest duds. Shares of both companies have spent much of their time trading below their I.P.O. price. At their lows, the two firms had shed about $25 billion in combined market value.
• But some have delivered big returns. The best performer? Beyond Meat, the maker of plant-based meat alternatives, whose shares are up more than 500 percent. And the stocks of PagerDuty, Zoom Video and CrowdStrike have more than doubled from their I.P.O. price.
More broadly, the U.S. remained the biggest market for I.P.O.s. Overall, 467 companies went public worldwide during the first half of 2019, raising $63 billion. Nearly half of those proceeds came from companies listing on U.S. exchanges — the country’s best showing since 2014.
But Europe disappointed. I.P.O. volume there tumbled: Just 42 companies listed shares on European exchanges during the first six months of the year, raising $10 billion. That’s the fewest companies since 2009 and the least raised since 2011.
And there was one notable non-I.P.O. The messaging company Slack eschewed convention and chose a direct listing, in which companies enter the public market but do not issue new shares or raise additional capital. The success of its listing (its shares rose about 50 percent on the first day of trading) and of Spotify’s (which went public through a direct listing last year) mean we can probably expect to see more of this in the future.
Morgan Stanley topped the rankings of I.P.O. bookrunners globally, followed by Goldman Sachs and JPMorgan. Citigroup and Bank of America rounded out the top 5.
M.&.A. bounces back
Deal making rebounded strongly in the first half of the year, thanks mainly to a slew of transactions ringing in above the $10 billion mark.
It was the third-strongest first half on record. The total value of global transactions increased 15 percent from the final six months of 2018, to about $2 trillion, according to data from Refinitiv. But it was down 12 percent compared to the first six months of 2018.
• So-called megamergers, which are valued at $10 billion or more, accounted for 42 percent of the total.
America’s strong economy helped. Despite concerns about the trade war between Washington and Beijing, the economy proved surprisingly resilient and helped deal making soar.
• The value of announced U.S. deals hit $1.1 trillion — a 20 percent increase from a year ago, and the first time that U.S. deal volume had crossed the $1 trillion mark during the first six months of the year.
• The proposed $86 billion merger of United Technology and Raytheon was the largest deal of the year. That was followed by Bristol-Myers Squibb’s announced acquisition of Celgene and Abbvie’s planned purchase of Allergan.
• Still, even in the U.S., there were some signs of caution: American companies more frequently used stock to finance acquisitions, instead of cash. Paying in cash typically requires greater confidence in the economy’s prospects and the target company’s financial projections.
And geopolitics has cast a cloud elsewhere. “Coming off the strong performance in 2018, geopolitical issues such as the trade tensions with China, interest rate uncertainty and broad market volatility are key factors slowing the pace of deal making this year,” said David Gibbons, the global head of the law firm Hogan Lovells’s corporate practice.
• President Trump’s trade policy has reverberated through the global economy, exacerbating a slowdown in China that has dragged on growth in Europe, which was already suffering from the fallout of Brexit. In those two markets, M.&A. activity tumbled.
• The value of acquisitions in Europe fell 57 percent compared with the same period last year, with European mergers accounting for just 15 percent of the total worldwide. That would rank as the lowest share in at least two decades.
• In China, the value of deals fell about 29 percent from a year earlier. Chinese companies, which went on an overseas shopping spree three years ago, also announced just $19 billion in acquisitions outside the country, down about 74 percent from a year ago.
• So-called cross-border deal making continued to fall. The value of such deals dropped 46 percent from a year ago.
And some big deals are facing obstacles, such as activist investors and hostile interlopers who are trying to stand in the way of them being closed.
• Bill Ackman and Dan Loeb slammed United Technologies’s merger with Raytheon. Wellington Management and Starboard publicly opposed Bristol-Myers Squibb’s takeover of Celgene. Newmont Mining promised to pay a large dividend to win support for its $10 billion merger with Goldcorp.
• This could explain why two of the largest deals of the year — AbbVie and Occidental — were structured so that shareholders didn’t get a vote on proceedings.
Topping the rankings for M.&A. advisers by deal volume were JPMorgan, Goldman, Morgan Stanley, Citigroup and Evercore.
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The market rally
Fears of a looming recession, and the resulting tumult that gripped the market as 2018 came to a close, quickly faded in the New Year.
In fact, stocks have recorded one of their strongest rallies in recent times. The S&P 500 has gained more than 17 percent since the start of the year, its best performance in the first six months of a year in more than two decades. The Dow rose 14 percent, and the Nasdaq 21 percent.
• Tech once again led the market higher, up 26 percent despite the trade war and growing regulatory and political pressure.
• Shares of Facebook were the best performers among the largest tech firms, up 47 percent. Microsoft’s 31 percent rally pushed its market value to $1 trillion, making it the most valuable company.
And one asset outperforming them all was Bitcoin. The highly volatile, and much maligned, cryptocurrency rose about 180 percent so far this year, even rising to as much as $14,000 this past week. (At the time of writing, it’s back below $12,000.)
“April was up 3.93 percent, closing at a new high (2945.83), May was down 6.58 percent (2752.06), closing two-thirds of the way to a correction, and June was up 6.89 percent (2941.76), as it posted the best June since 1955.”
• Yields on government bonds have been falling fast — everywhere. Australia, Britain, Germany Japan and the U.S. have all experienced it, and the value of negative yielding bonds around the world hit $13 trillion in the past week.
• The yield on the 10-year Treasury note — usually considered to be an incredibly risk-free investment — plunged below 2 percent several times this year, for the first time since President Trump was elected.
• In fact, the U.S. government bond that’s due in three months will currently pay a higher yield than a government bond that is due in 10 years — a phenomenon known as an “inversion.” Such occurrences are rare, but they have preceded every recession over the last 60 years (although some of those downturns took up to two years to materialize).
• Oil prices earlier in June had tumbled more than 20 percent since late April because of growing fears that demand would be weaker than expected as the global economy slows.
What now?
Here’s what some of Wall Street’s experts have to say about the next six months of 2019:
Rising political uncertainties “still seem to be the main economic risk,” write strategists at the Wells Fargo Investment Institute. “Fortunately, fiscal and monetary policymakers in the U.S., Europe, and China have added stimulus measures, and more global central banks are likely to cut interest rates. A U.S.-China trade agreement could help restore positive global trade growth and may particularly benefit Europe and Japan.”
“We are going through the third midcycle slowdown of the post-crisis period,” said Evan Brown, head of macro asset allocation strategy at UBS Asset Management. “Part of what’s driving it is China’s prior stimulus rolling off, the U.S. fiscal stimulus rolling off as well, the lag effects of tighter monetary policy last year and trade tensions creating uncertainty for businesses. If I could sum up our macro view, it is bend don’t break, or in other words, we don’t think we are heading to a recession.”
“It’s true that the expansion cycle has been much longer than usual, and the supporting trends are starting to decay,” Brad McMillan, chief investment officer for Commonwealth Financial Network, said in a note. “Nevertheless, the balance of 2019 looks likely to bring more of the same: more economic growth, slow but steady; more market appreciation, ditto; and more normalization across the board. It’s not a bad place to be.”
“Recession? What recession?” write strategists at the Capital Group in another note. “The Fed’s policy pivot and lower-for-longer rates are extending the life of this economic cycle. But late-cycle conditions are mounting. Rising wages will put pressure on profits, plus a flood of corporate debt could pose problems when the tide turns. Stocks may have room to run, but be ready for a bumpy ride. Investors should expect more late-cycle volatility. It’s not too early to prepare portfolios for rougher seas ahead.”
