In June 1919, two daring British aviators guided a modified Vickers WW1 bomber across the Atlantic to complete the first non-stop transatlantic flight in just under 72 hours. Fifty years later, in March 1969, André Turcat piloted the supersonic Concorde’s maiden Toulouse flight which lasted only 27 minutes— barely enough time for dear André to finish his Orangina.

While perhaps romanticising these two feats, they underscore a notable dynamic.

Increased levels of innovation during difficult times create an amplified economic impact and opportunity in the ensuing years. This impact may not be entirely appreciated, most especially as it relates to today.

Innovating the Tech and the Business Model too

Furthermore, an unprecedented level of tech innovation, coupled with a maniacal focus on business model innovation/rationalisation, should deliver an amplified economic, earnings and productivity impact for years to come.

A recent McKinsey report stated three out of four executives believe changes brought about from the pandemic will be a significant growth opportunity. And all executives agreed, Dolly Parton’s “Jingle Bells” rendition was “one of the greatest holiday songs ever.” Thanks for that, McKinsey!

While more efficient business models are lovely, for publicly-traded equities, some of this is already baked in, as equity valuations are pricier than a fully-refundable Concorde ticket from CDG to Rio.

Although this double scoop of innovation provides ample opportunity broadly, there is also an avalanche of irrationality and noise, especially within the uncharted crypto and NFT worlds.

To quote universally-cherished Laura Dern in genius David Lynch’s Wild at Heart: “This whole world is wild at heart and weird on top.”

So, we try to retain a soberish Warren Buffet/Cathie Woods style view on fundamentals, tangibles and execution.

Innovation to Mitigate the Flurry of 2022 Risks

As we look to deploy capital in 2022, we think this innovation-led and justified business model framework provides a grounded and reassuring logic for navigating the uncertain days ahead.

With a Royal Flush of risk (political + market + COVID + inflationary + interest rate), we are biased to deploying capital to private companies over public equities, early-stage businesses over mature, and innovators over brands. Our favourite sectors remain healthcare and technology with an affinity for companies that include unique and agile models, strong and bold operators, and underlying proprietary tech with clearly-defined adoption paths.

Last year, after investing in and later assuming the CFO role at Los Angeles-based startup Binj, a new platform that solves the “what to watch next problem”, these themes helped frame the way we operated and communicated. In telling our story and in preparing to launch the platform, we beefed up messaging around tangible strengths—a novel TV and movie discovery tool powered by a proprietary AI engine and new emotional-driven rating language—and how we would execute on thoughtfully building a community to navigate streaming content overload.

Going sector by sector, within the below, we’ve outlined our thoughts on some disjointed topics du jour and investment areas we like.

Economic Growth and Labour Reshuffle: We expect overall economic growth will be stronger than predicted with innovation’s fruit and the most dramatic reshuffling of the job market seen in a century fuelling new activity. We’re not putting a lot of weight on 2021’s final GDP % growth number though, given 2020 was oh so weak and there is a lot of noise in the numbers. Nonetheless, 2022 growth should continue at a similar cadence.

Interest Rates & Inflation: With almost every single holiday party and central bank meeting behind us, it is clear that inflation is even more serious than we previously thought. The Fed policy pivot and The Bank of England’s more dramatic and unexpected rate increase from 0.1% to 0.25% (the first increase in over three years) underscored this.

Global Equity Markets: With valuation multiples rich, equity markets will remain choppy and range-bound, especially with higher interest rates.

Deep Tech: Some of the greatest technologies have always existed courtesy of Mother Nature and some entrepreneurs are well-positioned to harness, mimic and unleash that which has always been present. Companies such as Silicon Valley-based Koniku blend the right ingredients of healthcare, technology, and biosecurity. A Shazaam for smells, the company’s central tech elegantly takes what already works amazingly well in the natural world (a dog’s sensory apparatus) and packages it into a small device that can seamlessly detect explosives, narcotics, and COVD in real-time.

Our favourite sectors remain healthcare and technology with an affinity for companies that include unique and agile models, strong and bold operators, and underlying proprietary tech with clearly-defined adoption paths.

Africa: An emerging middle class, swift mobile adoption, and green pastures for innovation and leapfrogging, yield tailwinds. We like founders who courageously collaborate with various stakeholders (employees, partners, regulators), genuinely feel the pulse of the customer and utilise tech to magnify opportunities on the ground. In particular, Nigeria-based Lifestores Healthcare (a rapidly expanding network of tech-enabled pharmacies), and Kenya-based Koa (an innovative, community FinTech platform), are well-positioned.

Preventative Health Services: The pandemic has enabled consumers to access healthcare more broadly than ever before and raised awareness on preventive care. We think companies that are empowering users with enhanced access and new types of information such as Phosphorus (a preventive genomics testing company that enables customers to optimally map their health journey based on their DNA), and Freenome (an early-stage cancer detection platform), are ahead of the curve.

FinTech: Growth will remain hot with fewer brick and mortar banks of yesteryear, increased consumer comfort around mobile banking, and new one-stop platforms that go beyond full-service legacy bank offerings. One such innovator is Pallo (an all-in-one platform designed specifically for freelancers, which helps users manage all personal and business finances, from money management to taxes).

2022 Should Be Better

Whilst history is obviously not always the best predictor of future success (Google Glass, Apple Maps, Speed II: Cruise Control) this innovation factor is objectively real and potentially more potent than in 1919 or 1969.

While in this piece, we have pointedly omitted some dramatical forces at play that are above our predictive pay grade (China’s muscle and Russia’s flex, crypto and NFT chaos, the painful $USD demise, omicron, Kristin Stewart’s portrayal of Diana in Spencer), on the simplest level we think 2022 should be markedly better than 2021 for most things but most certainly not for air travel.

About the Author

Steven Barrow Barlow serves as the CFO of BINJ and co-runs Andon Okapi Holdings, an investment firm providing financial, operational and strategic support to founders with big ideas & unique tech. After a decade as an equity analyst on Wall Street covering the consumer and healthcare sectors, he co-founded Kallpod in 2014, a tech solutions provider for the hospitality & healthcare industries.

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No Investment Advice

The content in this article is for informational purposes only and should not be construed as financial advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by Steven Barrow Barlow, BINJ, Finance Monthly or any third-party service provider to buy or sell any securities or other financial instruments.

Turbulence always creates opportunities for winners and losers to emerge but, following a brief pause on activity at the outset of the pandemic in 2020, dealmaking rebounded strongly throughout 2021 and Bloomberg Business Week notes that global transactions are set to top $5 trillion by the end of the year.

These figures come despite economic volatility and the prospect of tougher competition regulation. Capital, appetite and opportunity have not been in short supply, and investors – particularly within private equity – have been keen to make up for lost time and put excess cash stockpiles to work. The low-interest rates environment is also a factor that has driven activity, alongside the abundance of capital flowing into the economy and chasing deals. This liquidity can also be explained in part by the availability of cheap debt. The coming together of these factors has created a strong pipeline of dealmaking activity and intense competition to get transactions done.

Tim Nye, head of corporate at Trowers commented: "Competition has been so fierce that pent-up demand has led to the amount of capital that can be put to work outweighing the number of deals available. The knock-on impact of this is that confidence has sky-rocketed and valuations have soared."

He adds: "These trends show no signs of abating, based on our conversations within the dealmaking community, and we, therefore, expect a continuation of strong M&A activity throughout 2022".

Dealing with change

The health, social and economic challenges created by COVID-19 meant that organisations of all shapes and sizes had to adjust their business plans and corporate growth strategies. For many, organic growth became more difficult and dealmaking, therefore, grew in importance as a primary option for achieving scale or entering new markets.

The ability to be nimble and agile during intense uncertainty and upheaval has been a key for success, and the best way to pivot into new areas over the past year has often been through merger or acquisition.

In certain sectors where disruption has led to huge changes in demand for services, consolidation and the birth of new market entrants have also provided dealmaking opportunities. Healthcare – and particularly HealthTech – has been an active sector as a result of spiking demand for services related both to the pandemic and to the maintenance of business-as-usual healthcare provision as backlogs grew in the wake of lockdown and other restrictions.

Elsewhere, Real Estate has been heavily impacted during 2020-2021 thanks to social restrictions inhibiting peoples’ ability to carry out a range of activities – from working in the office to visiting retail destinations and using leisure and hospitality venues. With smaller organisations struggling with this uncertainty, and the recent or impending withdrawal of government support schemes, some consolidation activity has occurred with larger entities buying up smaller rivals.

Other sub-sectors have been impacted differently, with industrial and logistics sites seeing spikes in demand thanks to the growing use of online retail and home deliveries as people were forced to spend more time in their own properties.

The ESG imperative

Towards the end of the year, COP26 took centre-stage in November, as world leaders gathered in Glasgow to discuss the changes and commitments that need to be made to achieve net-zero goals and turn the tide in the fight against climate change. The pandemic also helped to thrust ESG considerations into the spotlight, as the impact of an unprecedented global crisis was felt acutely in all corners of the world.

The role of corporates in driving the ESG agenda is vital. With governments, regulators, customers, employees, lenders, insurers and investors increasingly judging companies based on their ESG commitments, these themes are working their way onto the transactional agenda, too.

Just under two-thirds of respondents to a recent Trowers & Hamlins research survey identified ESG as either a significant dealmaking factor or an important factor ‘to a certain extent’, as pressure mounts for due diligence into potential acquisition targets to go deeper than ever before when analysing ESG issues. Large financial institutions from banks to insurers are factoring ESG risks into their pricing decisions, so an ability to demonstrate ESG credentials in those areas is becoming more and more important. With the direction of travel clear for all to see, savvy leaders will already be looking to get ahead of the curve on this to save themselves potential exposure later down the line.

Alison Chivers, corporate partner at Trowers explains: "ESG is an opportunity to set yourself apart from your competitors. If you’re not doing it, you risk finding it harder to get investment, financing or insurance. If you are taking the lead, you can expect to see the benefits.”

As we enter 2022, the embedding of recent and new regulation and guidance will only heighten the need for organisations across all sectors to get their ESG houses in order – this will cover a range of risk areas from working conditions, gender pay and executive remuneration reporting through to climate and sustainability policies. As data and disclosure in these areas become more sophisticated, potential transactions may be scuppered if the ESG numbers do not add up. This in particular is one strong trend from 2021 which we are expecting to become even more deeply ingrained in the minds of dealmaking decision-makers through 2022.

It was an eventful start to February for global stock markets – and here with some pointers for the first quarter and to remind us of why a long-term view is important, is Kasim Zafar, Portfolio Manager at EQ Investors.

Equity markets had a very strong start to the year, continuing their trend from 2017 and supported by robust economic and earnings growth. For the first time since September 2011, all geographic regions are achieving sustained positive earnings growth – and we see this global ‘synchronicity’ as generally being a good thing.

However, with the S&P 500 (as an example) up 7% year to date in mid-January, the magnitude of this momentum was difficult to justify. Subsequently, we have seen some violent moves in markets. In our view this was a long overdue market correction and see volatility as a healthy sign investors are taking account of the risks inherent in markets.

So our current outlook and base case remain unchanged: global growth has improved markedly and inflation expectations in Europe and the US are increasing. This has led to more hawkish rhetoric from central banks – including plans to increase interest rates and rein back on quantitative easing – but in the grand scheme of things they remain relatively accommodative.

Recently, we have marginally increased our developed equity exposure, and remain excited by developments in Japan & Europe where we are overweight our long term benchmarks. Political stability is set to continue in Japan following the re-election of Prime Minister Shinzo Abe. This likely means business as usual and a continuation of structural reforms feeding through into strong corporate earnings and wage growth.

And European growth prospects are now among the most exciting globally, after years lagging other developed markets. Europe is likely to benefit in a similar vein to Asia from ongoing synchronised global growth and its economic recovery is much less mature than that in the UK or the US – with low inflation suggesting that, in spite of strong growth, the economy is some way from overheating.

We still hold a slightly negative view on long duration bonds as inflation may rise in the short term – negatively impacting values. With tight credit spreads we see little value in either investment grade or high yield bonds as an asset class either. So in fixed income we continue to invest in flexible strategies that can take advantage of specific opportunities as they arise.

One impact of globalisation is that corporate revenues and earnings are increasingly spread across the globe. This has a big impact on geographic equity allocation, which has been the basis for traditional asset allocation. In short, it is far less relevant than it once was. As an example, around 80% of revenues generated by FTSE 100 companies (i.e. listed in the UK) come from overseas.

Because of this, and drawing the success of this approach with our Positive Impact Portfolios, the research team are increasingly finding interesting investment ideas from funds that invest in global themes rather than specific geographies.

Healthcare, artificial intelligence and the millennial generation are three examples and you can expect more of this ‘thematic thinking’ in our outlook going forward.

S&P Global Ratings said that its top 50 rated European banks turned a corner last year, a decade after the start of the financial crisis, and are likely to continue down this brighter path in 2018, according to the report, ‘The Top Trends Shaping Major European Banks In 2018’.

Idiosyncratic developments aside, there was clear forward momentum, culminating in a raft of positive rating actions (outlook changes and upgrades) across a number of European banking systems in the third and fourth quarters.

"These actions reflected principally our view of improving economic risks, helped by massive monetary stimulus from central banks, and supportive industry risks, notwithstanding the emergence of fundamental long-term business model challenges," said S&P Global Ratings credit analyst Giles Edwards.

Elsewhere, for example in Sweden and Germany, our concern about looming asset bubbles receded somewhat. What's more, for a few banks, we recognized a strengthening in their balance sheets, typically improving capitalization or a growing bail-in buffer.

We start 2018 with no fewer than 15 of the top 50 European banks carrying a positive outlook and only three with negative outlooks on the issuer credit ratings (ICRs), suggesting that this should be another year of generally positive ratings developments.

Under this supportive base case, here are trends we expect to play out in 2018:

"However, European banks' progress in areas like NPA reduction and debt issuance and the emerging improvement in economic activity could yet be undone if political risks rise or market conditions deteriorate significantly," Mr. Edwards said.

Furthermore, we continue to monitor the long-term challenges that European banks face:

(Source: S&P Global Ratings)

According to a new whitepaper from asset management strategy consultancy Casey Quirk, a practice of Deloitte Consulting LLP, the industry is likely to experience "the largest competitive re-alignment in asset management history" through merger and acquisition activity from 2017 to 2020.

According to its new Investment Management M&A Outlook, "Skill Through Scale? The Role of M&A in a Consolidating Industry," Casey Quirk expects strong merger and acquisition activity in 2017 with a continued historic pace of deals through 2020.

Among the factors driving this brisk activity in 2017 and beyond are an aging population, affecting industry asset levels and flows, as well as a broad shift to passive management that has created pressure on industry fees and placed greater value on firms with valuable distribution platforms and those investing in technology. Forty-four deals took place in the first quarter of 2017, and Casey Quirk expects 2017's volume to likely outpace the last two years.

"Investment management has become a fiercely competitive industry, increasingly shaped by the same winner-take-all dynamics influencing other maturing financial services sectors," said Ben Phillips, a principal and investment management lead strategist with Casey Quirk and one of the authors. "Amid this challenged marketplace, the gap is widening between leading and lagging asset and wealth management firms. Unlike deals of the past, consolidation pressures, with a focus on scale, will likely drive the next round of M&A activity to position firms for growth."

According to Casey Quirk, most of the investment management merger and acquisition deals in 2017 and in the next few years should fall in the following categories:

• Transformative scale acquisitions driven by the quest for revenue and cost synergies. These deals should be larger than in the past several years and should include more global mergers of equals.
• Capability-based transactions, mostly representing additions of innovative investment products and technology needs.
• Shifting value chain deals, with many asset managers acquiring firms that help them extend their capabilities in such areas as distribution, wealth management or advice.
• Pure consolidation deals structured to spread costs over a larger client asset base; several may take place in the US mutual fund marketplace.

"Economic pressure, distributor consolidation, the need for new capabilities, and a shifting value chain are the catalysts that are fueling M&A activity," said Masaki Noda, Deloitte Risk and Financial Advisory managing director, Deloitte & Touche LLP, and co-author of the paper. "Asset managers are feeling pressure from many corners and are looking for ways to secure a competitive advantage. Strategic deals may be the answer."

In 2016, 133 mergers and acquisitions occurred in the asset management and wealth management industries, down slightly from 145 in 2015, but with a higher average deal value, up from $240.9 million in 2015 to $536.4 million last year. In investment management, about half of the deals rose from the need to add capabilities such as innovative investment strategies or access to new market segments. In wealth management, the vast majority of transactions—64 out of 78—resulted from consolidation, as various smaller wealth managers sought to improve profitability through economies of scale. Merger and acquisition deal volume by category is from SNL Financial, Pionline.com, Casey Quirk analysis and Deloitte analysis.

(Source: Casey Quirk)

While challenges face commercial real estate markets, realtors specializing in the sector should have confidence that growth will continue. That's according to speakers at a commercial economic issues and trends forum at the REALTORS® Legislative Meetings & Trade Expo.

NAR Chief Economist Lawrence Yun led a panel discussion about the economic forces shaping commercial real estate markets; the panelists agreed that the market has improved and that continued growth in the economy will further drive activity, but difficulties remain regarding availability of financing for smaller commercial properties.

George Ratiu, NAR director of quantitative and commercial research, said that increased trade and the rise of e-commerce has boosted rents in the industrial and warehouse sector. "During a time of transformation in consumer shopping habit, vacancy rates will still continue to see a gradual decline in warehousing and strong rent growth will continue," he said.

Unemployment has declined to 4.4% and consumer confidence is at its highest point in 15 years. As the economy improves, the commercial real estate market has continued to improve as well, said Yun. "A rising interest rate environment is likely to halt commercial price growth or even cause a minor decline; that outlook is supported by the expanding economy and the over 2 million jobs gained in the past year," he said.

Looking at the global market, Ratiu explained that global commercial investors have hit the pause button on investments, which in the first quarter of 2017 decreased nearly 20% year-over-year; however, certain US markets are seeing good global cash flow with $76 billion flowing to the US. "Overall global investments are down, while the San Francisco, Dallas, Charlotte, Houston and Baltimore markets have experienced large sales volume gains," he said.

With the blip in overall global investments in the first quarter, international buyers are likely to play a greater role in the US market this year. “Over the past five years, a near majority of realtors experienced an increase in the number of international clients. We expect international buying activity to grow in 2017, which will have an overall positive impact on the commercial market's gradual recovery," said Yun.

One major hurdle that continues to affect the market is the lack of available financing to small commercial real estate investors, due in large part to regulatory uncertainty.

"Realtors are seeing evidence of markets being impacted by regulators' increased scrutiny of banks' balance sheet allocations to commercial real estate loans," said Ratiu. "Considering that 64% of Realtor® clients get their financing from banks, this is likely to impact deal flow as lending conditions tightened in 37% of Realtors' markets, a four% increase from last year."

John Worth, senior vice president of research and investor outreach at the National Association of Real Estate Investment Trusts, discussed the performance of commercial real estate investment and its status among other investment sectors. "Real estate investment is currently the best performing asset class. Strong returns and the level of new commercial supply we are seeing today is making up for a lot of missing sectors, following the economic downturn. The first quarter of this year saw a slight decrease, but 2017 is experiencing an overall healthy trend," he said.

(Source: National Association of Realtors)

Growth expectations for 2017 remain at 2.0%, according to the Fannie Mae Economic & Strategic Research (ESR) Group's May 2017 Economic and Housing Outlook. For the fourth consecutive year, first quarter US growth slowed from the fourth quarter, partly reflecting ongoing seasonality issues. However, incoming data suggest that consumer spending growth will pick up this quarter.

Meanwhile, businesses will likely increase production in an effort to rebuild inventories, turning inventory investment into a positive for, instead of a large drag on, growth. Given the tight labor market, the ESR Group continues to expect rate hikes in June and September. Housing was a bright spot during the first quarter, and home sales performed well going into the spring season, thanks to solid labor market conditions and a recent retreat in mortgage rates.

"Once again, our full-year growth forecast remains intact as the economy grinds along, with the prospect of material policy changes appearing to be delayed," said Fannie Mae Chief Economist Doug Duncan. "We expect consumer spending to resume its role as the biggest driver of growth in the second quarter amid improvements in the labor market. Positive demographic factors should continue to reshape the housing market, as rising employment and incomes appear to be positively influencing millennial homeownership rates. However, the tight supply of homes for sale continues to act as both a boon to home prices and an impediment to affordability."

Visit the Economic & Strategic Research site at www.fanniemae.com to read the full May 2017 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary.

(Source: Fannie Mae)

Global IPO activity got off to a brisk start in the first quarter of 2017, led by market gains in Asia-Pacific and the US hosting the first two megadeals of the year. In the first three months of 2017, some 369 IPOs raised $33.7b, a 92% year-over-year increase in the global number of IPOs and a 146% increase in global proceeds. Moreover, Q1 2017 was the most active first quarter by global number of IPOs since Q1 2007 (with 399 IPOs raising $47.5b). These and other findings were published in the EY quarterly report, Global IPO Trends: Q1 2017.

Dr. Martin Steinbach, EY Global and EY EMEIA IPO Leader, says: "This is a promising start to global IPO activity this year. In the face of sustained global economic uncertainty, the first quarter of this year has set the stage for accelerated growth in 2017. Economic fundamentals are improving in the major developed economies. Equity index performance and valuations are trending upward, with several major indices reaching all-time highs. Concurrently, volatility is low, underpinning positive IPO sentiment, which is also supported by the successful US listing of a large technology unicorn."

Asia-Pacific dominates global IPOs

Asia-Pacific, led by Greater China, once again dominated global IPO activity in Q1 2017, accounting for 70% of the global number of IPOs and 48% by global proceeds. Greater China exchanges were the busiest, hosting 182 IPOs, with the Shenzhen and Shanghai exchanges being most active and accounting for 20% (73 IPOs) and 19% (70) of the global number of IPOs respectively. However, activity was spread across the region with a healthy set of listings on public markets in Japan (27), Australia (23), Southeast Asia (14) and South Korea (12). In the short-term, Greater China, and by extension Asia-Pacific, is expected to continue its dominance of the global IPO market as the China Securities Regulatory Commission (CSRC) is anticipated to clear an extensive backlog of listings by increasing the pace of IPO approvals throughout this year.

Ringo Choi, EY Asia-Pacific IPO Leader, says: "IPO activity in Asia-Pacific has been powering ahead due to the region's relative insulation from political uncertainty elsewhere in the world, ample liquidity in emerging markets and strengthening investor sentiment on the back of reduced volatility and steady stock market gains. While IPO activity is likely to increase on Mainland China and selected ASEAN exchanges during the second and third quarters, there may be a slowdown in new listings in other markets. Hence, this region may see a temporary drop in activity, but is expected to rebound in the final quarter of the year."

EMEIA IPO activity affected by geopolitical uncertainty

With growing geopolitical uncertainty, activity in the EMEIA region increased slightly by 8.5% YOY, ranking second behind Asia-Pacific by number of IPOs in Q1 2017, and accounting for 21% and 15% of global number of IPOs and proceeds respectively. Bolsa de Madrid, London Main and AIM, and Bombay Main Market and SME were the three most active markets by proceeds. India and the UK were the most active regional markets with 26 and 12 IPOs respectively, followed by Saudi Arabia, which listed seven deals on its new platform, "Nomu – Parallel Market," an alternative equity market with lighter listing requirements.

Steinbach says: "IPO activity in EMEIA was affected by heightened geopolitical uncertainty ahead of upcoming national elections and the build-up to the UK's declaration of Article 50, formalizing its intentions to exit the European Union. However, investor and business sentiment in EMEIA is rising as we continue to see regional equity indices at all-time highs, a growing IPO pipeline, a solid reporting season to date and strong economic fundamentals throughout the region. The key for companies looking to accelerate their growth this year while uncertainty stabilizes is to preserve optionality with a multitrack strategy approach."

US market returns to form

US IPO activity got off to a strong start in 2017, easily surpassing Q1 2016 levels in terms of both IPO numbers and proceeds. IPO proceeds for Q1 2017 are the highest since Q2 2015 (72 IPOs raising $14.3b). The quarter saw a total of 24 IPOs raising $10.8b, an increase of 1,380% in terms of proceeds and 200% by volume on Q1 2016. During Q1 2017, the US accounted for four of the top ten deals globally. The NYSE led IPO proceeds globally this quarter due its hosting of the only two $1b plus megadeals.

Jackie Kelley, EY Americas IPO Markets Leader, says: "The first quarter of 2017 was one of the strongest for the US IPO market and established a solid runway for more deals for the remainder of the year. This positive performance should attract more tech and unicorns to the public markets and further open the door for other sectors such as retail, energy, and real estate. With the market currently insulated from the political uncertainty, more companies are expected to enter the filing process."

2017 outlook is upbeat, despite mixed signals

The reaction to geopolitical events in the financial markets has been far more positive than many had predicted. Pent-up demand for public offerings suggests global IPOs will continue to rise in 2017, with pipelines full, particularly in Asia-Pacific.

Steinbach concludes: "Overall, global IPO markets had the best start with the highest first quarter by global number of IPOs since 2007. The upswing is buoyed by a strong desire for investors to generate returns and the positive momentum from a strong IPO activity in the fourth quarter 2016. However, ongoing uncertainty continues to define the global conversation, in spite of the market rallies seen in many main market indices after respective US presidential and Brexit votes."

(Source: EY)

Growth expectations for 2017 remain subject to both upside and downside risks from potential policy changes as the Federal Reserve considers raising interest rates for the second time in three months, according to the Fannie Mae Economic & Strategic Research (ESR) Group's March 2017 Economic and Housing Outlook. Full-year economic growth is projected at 2.0 percent, unchanged from last month, while the forecast for current quarter growth is down slightly due to weaker-than-expected consumer spending data. Still, general business and economic sentiment remain strong despite policy uncertainty.

Thanks to rising household net worth and healthy jobs data, consumer spending should remain the primary driver of growth. A pickup in the Fed's favoured measure of inflation in January supported several Fed officials' hawkish speeches, which led the market to fully price in a rate hike at the conclusion of the Fed meeting later today. The ESR Group expects today's target rate increase to be followed by two additional hikes in the second half of the year. Home sales should continue to improve this year despite affordability challenges, including continued strong home price appreciation due to scarce inventory.

"Our economic forecast remains in a conservative holding pattern as we await word on the particulars of the new Administration's plans for fiscal stimulus," said Fannie Mae Chief Economist Doug Duncan. "In the meantime, economic sentiment from most industry stakeholders continues to reach new heights: consumers, as demonstrated by our National Housing Survey, are more positive than at any time since the survey's inception in 2010 about the direction of the economy, while homebuilders' optimism remains near an eleven-year high."

"Tight inventory remains a boon to home prices and Americans' net worth, but it also continues to price out many would-be first-time homebuyers. However, our research suggests that aging millennials, now boasting higher real wages, are beginning to narrow the homeownership attainment gap," said Duncan.

(Source: Fannie Mae)

The updated lodging forecast released  by PwC US notes that strong industry performance in the fourth quarter of 2016, including encouraging trends in demand and average daily rate (ADR), coupled with a post-election surge in consumer and business sentiment that contributed to improving economic conditions, sets the stage for continued revenue per available room (RevPAR) growth in 2017.

PwC expects the increase in supply of hotel rooms to marginally outpace growth in demand, resulting in a decline in occupancy to 65.3%. Aided by an expected increase in corporate transient demand, growth in average daily rate is expected to drive a RevPAR increase of 2.3%, according to the report.

PwC's outlook is based on an economic forecast from IHS Markit, which expects real GDP to increase 2.3 percent in 2017, measured on a fourth-quarter-over-fourth-quarter basis, approximately 50 basis points higher than in PwC's November forecast. Improving economic conditions are driven by a number of factors, including improving business and consumer confidence, and surging financial markets, as well as potential policy decisions related to tax cuts and changes to trade regulations.

The updated estimates from PwC are based on a quarterly econometric analysis of the US lodging sector, using an updated forecast released by IHS Markit and historical statistics supplied by STR and other data providers.

"Based on a strong fourth quarter, we are encouraged by the trends we are seeing as we head into 2017," said Scott D. Berman, principal and U.S. industry leader, hospitality & leisure, PwC. "However, we remain cautiously optimistic, as higher-than-previously anticipated increase in demand is still expected to be offset by increasing supply through the year."

(Source: PwC US)