Perspectives
2 December 2020
The emergence of COVID-19 profoundly altered the course of 2020, and its effect will be felt for years to come. The global pandemic and the subsequent response from governments, community and industry around the world has had a catalytic effect on markets and broader social, political and cultural trends alike, dramatically affecting the pace of change and accelerating many prevailing trends but disrupting others.
In M&A, 2020 is panning out to be a year of two halves. Initially, M&A activity was disrupted by the arrival of COVID-19, with the ensuing uncertainty impacting confidence and most businesses focused on continuity and navigating through the crisis. But the second half of the year saw a new narrative emerge. Whilst Australian M&A levels are down on last year, they have been increasing since July, with a number of significant transactions announced – many of which were conducted entirely virtually. The impact of the pandemic on M&A has varied by sector, with an uptick in volumes seen in the resources, financials and in particular, technology sectors.
In debt and equity capital markets, 2020 saw a strong increase in the amount of capital raised, with current levels already substantially exceeding 2019 volumes. As the pandemic took hold in Australia, companies moved decisively to raise equity to shore up their balance sheets to better navigate an unprecedented market environment. More recently, the focus has shifted to raising equity to fund M&A and new listings. Private capital is expected to facilitate a major role in the economic recovery, investing in line with the accelerated global themes.
As Australia and New Zealand responded to the health crisis, the lockdown radically impacted existing global trends, through acceleration or disruption. However, the response to COVID-19 has proliferated new possibilities as we look to 2021 and beyond.
COVID-19 has accelerated the digital transformation, rapidly enabling the new ways we are now connecting, working, eating, learning and seeking medical assistance. While the shift to online has been and will continue to be an enduring trend into 2021 and beyond, other current key trends are the deployment of 5G, and the significant investment into digital infrastructure required to support heightened network loads. Already, Australian investment into cloud Infrastructure as a Service (IaaS) is expected to hit $A1.1b in 2020 and reach $A2.0b by 20241. For legacy analogue companies, and historically technology-resistant sectors like health and education, this provides an opportunity to close the digital gap.
"COVID has forced organisations to pull forward technology adoption by many years. Becoming digital-ready is no longer an option, but a necessity."
Michael Milne, Division Director, Telecommunications, Media, Entertainment & Technology, Macquarie Capital, Australia & New Zealand
Strong population growth and the concentration of that population in our urban centres has long been a driver of demand for social and economic urban infrastructure in Australia. However, the closing of borders, shift to flexible working and changing commuter patterns has disrupted this trend and created opportunity for regional areas. Looking ahead, new infrastructure projects will be used as recovery stimulus by governments, with a pivot to flexible precincts, transport infrastructure, and regional projects.
John Pickhaver, Co-Head of Macquarie Capital, Australia and New Zealand says "Demand for urban, social and economic infrastructure in Australia has historically been driven by strong population growth and urbanisation. This theme will continue in the long term, but in the short term will be characterised by changing work and commuter patterns, adaptation of civic spaces and city precincts, and an acceleration of change driven by increased government infrastructure spending as economic stimulus".
Chart 1 - Working from home in metropolitan areas2
"In the short term, urbanisation will be characterised by changing work and commuter patterns, adaptation of civic spaces and city precincts, and increased government infrastructure spending."
John Pickhaver, Co-Head of Macquarie Capital, Australia & New Zealand
Early 2020 was dominated by the Australian bushfires, showcasing the tangible need for an acceleration to a greener global economy. During the course of the year, corporates have started to move ahead of policy and set significant targets to increase ESG accountability and reduce CO2 emissions. Exactly how many of these industry aspirations will be achieved is not yet clear, with further investment in technology required to accelerate decarbonisation and mitigate the effects of climate change. The Australian Government has identified a roadmap with key renewable technology priorities (including clean hydrogen and energy storage)3 which are likely to be critical to the journey to zero carbon – but it is clear that corporates and traditional energy players still have major roles to play to drive decarbonisation.
"2020 marked a turning point for many corporates in Australia in terms of setting meaningful targets to reduce greenhouse gas emissions and invest in technology required to meet Australia’s Paris commitments. Whilst there is much more work to be done, in 2021 we expect to see Australian corporates continue to move ahead of policy to meet their ESG obligations, a growing pool of green capital driving new investment, and traditional energy players reinventing themselves as decarbonisation champions," Kate Vidgen, Head of Energy Principal, Macquarie Capital.
Chart 2 - Australia’s emissions trajectory (versus Paris Agreement)4
"2020 marked a turning point for many corporates in terms of setting meaningful targets to reduce greenhouse gas emissions and invest in technology required to meet Australia’s Paris commitments."
Kate Vidgen, Head of Energy Principal, Macquarie Capital
Over the next decade, the Australian government has committed $A565b in defence spending, with $A15b allocated to boost cyber resilience5 . This reflects a growing desire for stability and security in response to unprecedented supply chain disruptions, increased deglobalisation, and a drastic increase in COVID-19 themed cyber scams in the wake of the pandemic. This significant investment in national resilience is likely to contribute to domestic job creation, unlock vast opportunity for Australian businesses in adjacent services, and position Australia as a potential powerhouse in cybersecurity.
David Mustow, Head of Industrials, Macquarie Capital, Australia and New Zealand says, "With significant defence spend over the next decade and a commitment to onshoring the ensuing jobs, it is clear there is abundant opportunity for domestic companies across construction, manufacturing, cybersecurity and healthcare to secure stable and lucrative funding for growth and innovation".
"There is abundant opportunity for domestic companies in construction, manufacturing, cybersecurity and healthcare to secure stable and lucrative funding for growth and innovation."
David Mustow, Head of Industrials, Macquarie Capital, Australia & New Zealand
Whilst the global themes of this year have seen acceleration and disruption, 2021 will mark a shift towards cautious optimism and a broad-based economic recovery. The expectation of a vaccine in 2021 is a hopeful sign that the worst is behind us. This, combined with growing consumer confidence, increasing sector resilience, a softening of geopolitical dialogue (due to a Biden presidency), low interest rates, significant competition for assets, and strong valuations provide a positive backdrop as 2020 draws to a close. However, the lesson from 2020 is that corporates, government, and investors alike will need to remain adaptable in the face of uncertainty and innovative in the pursuit of desirable projects.
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