Is a bit of confidence returning to the markets?
I’m going to whisper it quietly, but after a brutal couple of years, we are starting to see signs of confidence, or as former Chancellor Norman Lamont famously described it, “green shoots of recovery” in the capital and M&A markets as we start 2024.
Real asset sectors are still benefiting from the tailwind of the sharp reversal in rate rises at the back end of 2023 – as demonstrated by the significant narrowing of discounts in the listed Infrastructure & Real Estate Investment Trusts. This has been followed by the tentative start of a long overdue process of consolidation in this sector which may also support (again whisper it quietly) fresh equity capital being raised this year by existing and new trusts. This would provide a real boost to the much maligned UK equity markets and I wonder whether 2024 might herald a broader recovery in this space as UK & International investors capitalise on the stark undervaluation of UK equities.
In turn, this would provide a platform for increased IPO volumes and M&A activity in both public and private markets – both of which have a significant confidence aspect to them. With confidence and fresh capital both in very short supply over the last two years, investors have largely sat on their hands and focused on managing the many risks they have faced. Anecdotally, 2024 has seen many of our clients returning with renewed vigour and confidence and a determination to get deals done and there are clear signs of Keynes’ “animal spirits” returning to the markets.
Although borrowing rates have reversed, the jury is still out as to whether this is a mid-cycle reversal in a secular higher-rate world or a return to a low rate environment. On balance, my view is that it is the latter. Either way, higher quality sponsors and businesses appear to have got past the shock phase and have now adjusted to the realities of a higher cost of capital. Public, private and banking markets are all feeling positive and confident going into 2024, albeit with a degree of price discovery taking place in the public bond market following a period of exceptionally low volumes. Tight credit spreads are indicative of strong investor demand and confidence and compared to January 2023, our own Capital Markets team is seeing a much stronger deal pipeline, which is hopefully indicative of a healthy broader market.
It would be unwise to become overly exuberant just yet – many risks remain – political, geopolitical, inflation and energy related – to name but a few, but investors and financial markets have perhaps become more resilient after the last two years and are learning to live with higher levels of uncertainty and volatility.
So I hope that I’m not tempting fate and that 2024 is a year which sees a bit of swagger returning to UK and European markets and in particular a reversal in the fortune of the UK listed equity and debt markets, with a positive knock on effect to private markets.
Phil Jenkins, Managing Director at Centrus