Corporate Finance Advisory
2020 Vision
Ten Striking Facts for a New Decade | January 2020
Consumer spending is the cornerstone of U.S. GDP, making consumer confidence crucial
to continued economic strength even as businesses are increasingly cautious
Source: Data for CEO Economic Outlook sourced from the Business Roundtable; Data for Consumer Confidence sourced form The Conference Board; Data for GDP and PCE from U.S. Bureau of
Economic Analysis; Q-o-Q GDP growth from U.S. Bureau of Economic analysis
70%
55%
60%
65%
70%
75%
'47
'56
'65
'74
'83
'92
'01
'10
'19
Personal Consumption Expenditure as a % of GDP
U.S. personal consumption expenditures represent 70% of GDP, the highest level on record
Why it
matters
1
Consumer confidence has remained at or close to record highs in recent quarters, supporting continued U.S. economic growth
In contrast, CEO and business confidence levels have been falling for more than a year
With consumer spending more critical to U.S. GDP than at any time in history, will consumer confidence follow business
confidence lower – taking with it economic growth – or will business confidence rebound?
CEO Economic Outlook vs. Consumer Confidence
Recession
(4%)
(2%)
0%
2%
4%
6%
8%
10%
12%
14%
16%
(40)
(20)
0
20
40
60
80
100
120
140
160
Q1'0
3
Q1'0
4
Q1'0
5
Q1'0
6
Q1'0
7
Q1'0
8
Q1'0
9
Q1'1
0
Q1'1
1
Q1'1
2
Q1'1
3
Q1'1
4
Q1'1
5
Q1'1
6
Q1'1
7
Q1'1
8
Q1'1
9
CEO Economic Outlook Index (LHS) Consumer Confidence Index (LHS) U.S. GDP growth (RHS)
1
15% 18%
22%
15% 16% 17% 14% 16% 14% 13%
11% 11% 12% 10% 8% 7%
10% 6%
39% 36% 30%
36% 33% 30%
32% 27% 29% 29%
29% 28% 26% 27%
27% 26% 23%
26%
54% 54% 52%
51% 49%
46% 46%
43% 43% 42% 40%
38% 38% 37% 35%
34% 33% 31%
JP
N
DE
U
ES
P
ITA
FR
A
AU
T
OE
CD
IRL
BE
L
CA
N
NL
D
DN
K
GB
R
US
A
SW
E
FIN
NZ
L
NO
R
High risk of automation Significant risk of change
80%
70%
73%
75%
78%
80%
83%
85%
'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16 '19
U.S. employment remains strong but automation poses a significant risk
U.S. employment participation – Aged 25-541 Jobs at risk of automation
2
Source: Data for U.S. employment stats from U.S. Bureau of Labor Statistics, gig economy data from “Freelancing In America 2019” report published by Upwork, Jobs at the risk of automation from
OECD; 1 Civilian Labor Force Participation Rate: 25 to 54 years
Gig economy grew ~1.5 times faster
than US working population
7.5%
4.8% 4.2%
Gig economy Workingpopulation
Participationrate
2014 – 2019 growth rates
Almost 50% of all jobs in developed countries are at risk of automation or of significant change
Why it
matters
Employment participation has continued to rebound strongly, supporting the low unemployment rate and improving wage trends
Risk of disruption to the workforce may alter the way future economic recoveries occur, particularly if a recession catalyzes automation
New opportunities may come in the form of ‘gig economy’ jobs that have been growing at ~1.5x the pace of broader employment
These ‘gig’ jobs are likely to be less certain, offer less financial security, and come with fewer benefits
Gig economy constitutes
one third of the working
population
2
50%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2000 2001 2003 2004 2006 2007 2009 2010 2012 2013 2015 2016 2018 2019
% (
yearly d
ata
)
Central bank easing has taken the world into a negative rates environment3
Source: Bloomberg; 1 Market date as of 12/27/2019
Share of central banks cutting rates (%)
Half the world’s central banks are cutting rates
Why it
matters
Monetary policy is a crucial tool in the central bank toolbox and the trend of how central banks have used their power to cut rates around the world is indicative of the broad economic concerns of 2019
No fewer than a dozen countries now have negative interest rates, which is likely to test the limits of policymakers should additional economic stimulus be necessary
Interestingly, despite the global policy easing witnessed in 2019, rates in many countries ended the year higher, possibly suggesting optimism that a global economic slowdown has been averted – at least for the moment
Countries with negative interest rates by tenor1
Negative yielding debt
Positive yielding debt
1-3 Yrs. 3-5 Yrs. 5-7 Yrs. 7-10 Yrs.10-15
Yrs.15+ Yrs.
Germany
Denmark
Japan
Netherlands
Belgium
France
Finland
Austria
Ireland
Sweden
Spain
Italy
US
3
China’s global influence continues to grow
Percentage of countries whose larger share of imports comes from the U.S. versus from China
2000 2010 2019
Source: Department of Trade Statistics – International Monetary Fund, SWIFT RMB Tracker 1 Full-year 2019 estimates calculated based on YTD August 2019 data; 2 2010 and 2019 figures as of October 2010 and October 2019 respectively
Share of RMB as
global payments currency2
4
United States69%
China22%
No data9%
$0.80tn$0.40tn
United States30%
China63%
No data7%
$1.20tn
$1.77tn
United States24%
China71%
No data5%
$1.55tn1
$2.48tn1
Percentage of total
global payments value2
#35 #6
0.31% 1.65%
Why it
matters
China has transformed itself into a global trade powerhouse, supplanting the U.S. as the larger import source for most countries
The dominance of USD and EUR has overshadowed the growth of the RMB’s role in global trade
China’s stated intent to develop a state-backed cryptocurrency may also have global trade and currency ramifications
With substantial investment around the world – particularly in parts of the developing world, such as Africa – China is well-positioned to see its global economic influence continue to increase regardless of how trade tensions with the U.S. play out
The portion of global payments transacting in Renminbi has increased more than five-fold in the last
decade
4
Dollar values represent total exports from the U.S. and from China
Even as more firms target “BBB” ratings, credit markets maintain an appetite for risk5
Source: J P Morgan, Capital IQ and Bloomberg. 1 Bloomberg Barclays U.S. Aggregate for A, Baa and Ba
The spread between BBB and BB credit costs is the lowest on record
Why it
matters
Firms across industries have migrated to “BBB” investment grade ratings over the last several decades
Credit markets appear relatively unfazed, with the spread between BBB and A credits at typical levels for the last several decades
With the incremental cost of debt for lower BB ratings at historic lows, the trend of taking on higher leverage and lower ratings may
continue, albeit with heightened risk in a late-cycle environment
21%
28%
36%
47%
11%
18%
24%
1990 2000 2010 2019
S&P 500 S&P 1500
% of “BBB” firms in S&P 500 and 1500 Credit spread differentiation by rating over time1
0.6%0.6%
Average over time 0.6% 1.6%
Standard deviation 0.3% 0.8%Recession
(2%)
(1%)
0%
1%
2%
3%
4%
5%
6%
7%
'94 '95 '96 '97 '98 '99 '01 '02 '03 '04 '05 '06 '08 '09 '10 '11 '12 '13 '15 '16 '17 '18 '19
A vs BBB BBB vs BB
5
U.S. corporate EPS growth has been supported by tax reform, low interest rates, and
share repurchases
S&P 500 EPS growth contributors (YE 2010 – Q3 2019)
100%
59%
7%
29%
27% 221%
70%
110%
150%
190%
230%
2010EPS
2019EPS
6
Source: Bloomberg; Note: Calculated on a company-by-company basis, with the median of each growth category displayed; Excludes Real Estate GICS sector; Price return and total return figures
represent 12/31/2010 to 12/31/2019; Figures shown might not tie precisely due to rounding
Just over half of U.S. corporate earnings per share growth over the last decade has been “fundamental”
Why it
matters
Only a little more than half (54%) of S&P 500 EPS growth over the last decade came from top-line growth and margin improvements
The remaining growth (46%) was driven by the stimulus of low rates (monetary policy), tax reform (fiscal policy), and share repurchases
In contrast, European firms have not benefitted from these factors to the same extent
U.S. firms may find themselves challenged to maintain this pace of growth even if their underlying businesses continue to perform
100%
41%6%
7% 2% 156%
70%
110%
150%
190%
230%
2010EPS
2019EPS
STOXX 600 EPS growth contributors (YE 2010 – Q3 2019)
Sales growth Operating margin expansion (contraction) Share count decrease (increase)Tax and interest impact
Price return: 156%
Total return: 209%
Price return: 51%
Total return: 106%
56%
65% 47%
9%
6
Index funds dominate as other strategies fail to differentiate themselves
Source: Bloomberg, Thomson Reuters Eikon as of 12/31/19
Note: Indices used to track performance include: S&P 500 Total Returns Index, S&P 500 Value Total Returns Index, S&P 500 Growth Total Returns Index, S&P 500 GARP Total Returns Index, S&P 500 Dividend & Free Cash
Flow Yield Index, Hedge Fund Research HFRX Global Hedge Fund Index, NYSE Bitcoin Index, , Bloomberg Barclays U.S. Corporate Investment Grade Total Return Index (Unhedged), Bloomberg Barclays U.S. Corporate High
Yield Total Return Index (Unhedged), Bloomberg Barclays U.S. Treasury Total Return Index (Unhedged), LBMA Gold Price PM USD Index, Thomson Reuters CoreCommodity CRB Commodity Index; 1 Tracks the S&P 500
Total Return Index; 2 ‘The great shareholder shift: Developing financial policies for an evolving shareholder base’: https://www.jpmorgan.com/jpmpdf/1320746569306.pdf
7
About one-in-four U.S. large-cap shares is held by an index fund
Why it
matters
The makeup of equity investor bases continues to evolve, with passive index funds representing a greater portion of shareholders
This trend is less surprising when considering that few strategies have substantially outperformed index strategies when taking into account risk incurred (i.e., volatility), and the difference is even more substantial when incorporating fees
The trend towards passive investing is expected to continue; thus, management teams should be prepared for fewer name- or sector-specific investors, greater investor concentration, and the possibility of increasing volatility, particularly around corporate events2
Equity Index1
Value Growth
GARP
Yield
Hedge Fund
Bitcoin
IG Bonds
HY BondsU.S.
Treasuries
Gold Commodities
0%
5%
10%
15%
20%
25%
30%
(10%) (5%) 0% 5% 10% 15% 20% 25% 30%
Annualiz
ed v
ola
tilit
y
10 year total return (annualized)
S&P 500 shareholder style over time Investor style performance vs. risk
6.1% 12.9%
23.8% 15.6%
20.7%
17.0%
0.5%
3.2%
4.2%
8.9%
14.9%
13.5%
5.8%
8.7%
5.4%
4.6%
6.8% 6.9%
20.3%
14.3% 16.0%
38.1%
18.4% 13.3%
2000 2010 Q3 2019
Index
Growth
Retail /
non-reporting
Hedge Fund
Value
GARP
Income / Yield
Other
75%
45%
7
Private company profits have grown at nearly twice the pace of public company profits since the Great
Financial Crisis
Private company profits have grown faster than public company profits
$896$1,058
$1,315$1,397
$1,592 $1,612$1,714 $1,655
$1,629 $1,651 $1,778$1,914
$584 $693 $741 $866 $886 $875 $894 $864 $852 $905 $981 $1,063
$312$365
$574$531
$706$737
$820
$791 $777 $746$797
$851
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Public Private
Aggregate U.S. pre-tax profits ($bn)
11.6x 11.9x 11.1x 12.3x 11.2x 10.3x 13.6x 15.8x 14.2x 14.6x 14.6x 12.9x
161 58 123 150 120 131 129 172 181 185 183 165
9.6% CAGR
5.6% CAGR
Median
Count
Source: Bloomberg, U.S. Bureau of Economic Analysis; Note: Profit figures represent all U.S. corporations; Private profit calculated as aggregate U.S. corporate profits (per St. Louis Fed) less
aggregate of all U.S. public company profits, for each year; Acquisition multiples represent public and private acquisitions of U.S. companies >$100mm since January 2008
8
Public acquisition multiples
Private acquisition multiples
Why it
matters
The last decade saw the emergence of private “unicorns” that garnered significant attention for their ultimate successes (and sometimes
failures) in the public markets
More generally, there has been a dramatic expansion of U.S. private company profits, suggesting that substantial investment and
growth is coming from outside the public capital markets
With private capital ‘dry powder’ also at record highs, the trend of private company investment (and growth) is likely to continue well into
the next decade
9.4x 8.1x 10.1x 12.1x 10.4x 11.9x 13.5x 12.8x 12.2x 11.5x 10.8x 11.3x
23 18 15 21 31 22 38 85 71 23 51 57
Median
Count
Recession
8
TJCARecessionHIARecession
U.S. corporate tax reform makes a small dent on total receipts but levels the playing field
$2.0 $2.0$1.9
$1.8$1.9
$2.2
$2.4$2.6 $2.5
$2.1 $2.2$2.3
$2.4
$2.8
$3.0
$3.2 $3.3 $3.3 $3.3$3.4
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Corporate income tax
Individual income tax
Social security
Other
TJCA
U.S. federal tax revenue ($tn) Average corporate tax rates (%)
Source: St. Louis Federal Reserve Bank, U.S. Bureau of Economic Analysis; The Tax Foundation; Note: HIA stands for Homeland Investment Act, TJCA stands for Tax Cuts and Jobs Act; 2019
figures represent YTD
Recession
9
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
United States
United Kingdom
European Union
Asia-pacific
HIARecession
Prior to tax reform, corporate taxes accounted for ~9% of total U.S. tax receipts; in 2019 that number is
expected to be ~6%
Why it
matters
Despite the substantial amount of time and attention given the U.S. tax reform, corporate tax receipts have historically only accounted
for a small portion of overall government revenue
For a relatively modest overall impact to U.S. revenues, U.S. tax reform was crucial in re-aligning the U.S.’s competitiveness on the
global stage
10% 8% 8% 7% 10% 13% 15% 14% 12% 7% 9% 8% 10% 10% 11% 11% 9% 9% 6% 6%Corp.
% total
9
(2.9%) (3.0%)
(4.6%)
1.2%
(0.8%)
(2.7%)
(0.2%)(1.3%)
1.3% 0.5%
(2.9%)(2.2%)
(3.6%)
1.1% 0.5%
3.9%
(2.3%)(1.2%)
1.3% 2.4%
(10.0%)
(5.0%)
0.0%
5.0%
10.0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
US ESG Total Return vs. S&P 500 (%) Europe ESG Total Return vs. MSCI Europe Index (%)
ESG strategies are attracting capital, but excess returns have been elusive
$13.8
($12.3)
$6.2
$32.2
$18.0
($6.3)
$11.6 $29.3
$7.3 $18.2 $40.7
($40.9)
$35.8
$76.6
$23.5 $1.1
$42.9
$136.5
$38.7
$71.0
($200)
($100)
$0
$100
$200
$300
$400
$500
($100)
($50)
$0
$50
$100
$150
$200
$250
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual NA ESG Inflows ($bn) Annual Europe ESG Inflows ($bn) Cumulative NA ESG Inflows ($bn) Cumulative Europe ESG Inflows ($bn)
Source: Bloomberg as of 12/31/19, Lipper
Note: Inflows correspond to equities and bonds; Europe ESG returns based on MSCI Europe ESG Leaders Index; US ESG returns based on MSCI USA ESG Leaders Index
10
U.S. ESG equity strategies have underperformed the broader market in seven of the last ten years
Why it
matters
While Environmental, Social, and Governance (ESG) investment strategies have attracted capital, particularly in Europe, these
strategies are yet to deliver consistent market outperformance
ESG considerations should be important aspect of Board and senior management decision-making, as more consistent outperformance
of ESG investment strategies are likely to further increase investor attention on these issues
Cum
ula
tive n
et
inflow
s
Annu
al in
flow
s
10
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