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After a 2021 boom, conditions for deals are more difficult with stock markets volatile and monetary policy tightening

It has been bonus season on Wall Street this month and for the ranks of bankers who work on mergers and acquisitions, it is about as good as it gets.

A record boom in deal activity last year has translated to big gains for bankers. Investment banks have announced bonus increases ranging from 20 to 49 per cent on the back of record fees. That should make sellers of Hamptons property, fine wine and non-fungible token art happy.

But the mood among M&A bankers has become little more circumspect since the turn of the year. Some are asking privately: have we passed the peak of the deal boom that started more than a decade ago?

“Topping 2021 was always going to be difficult,” one prominent rainmaker told me. On the back of a record nearly $6tn worth of deals agreed last year, investment banks generated $157bn in fees, including $47bn just for mergers and acquisition advice. Both fee levels were the most since Refinitiv began collecting data on them more than two decades ago.

The year capped a long streak where ultra low-interest rates, a booming stock market and unprecedented government support across the economy made it cheap to buy rivals, diversify businesses or play catch-up with an ever more digital economy. The share price of boutique advisers such as PJT Partners, Moelis and Evercore more than doubled over the past decade.

Now, though, stock market volatility tied to rising inflation and tightening monetary policy is creating uncertainty. Surely the partial reversal of many of the boomtime conditions for M&A should prompt a slowing of dealmaking?

Well it might not be as straightforward as that. Bankers, being bankers, are bullish on the record, especially the chiefs of publicly traded boutique firms that specialise in M&A and restructuring advisory work.

Ralph Schlosstein, the chief executive of Evercore, said recently that what sustained good M&A environments were strong equity markets, availability of debt and some visibility on the direction of the economy. Those all come together to support chief executive confidence. “We have all of those things right now,” he said at a recent investor presentation hosted by Goldman Sachs.

Paul Taubman, CEO of PJT Partners, also recently told investors that even if interest rates went up significantly, it would not have a dramatic impact on dealmaking as the true drivers of M&A were other factors.

“What’s been driving M&A activity has been this incredible transformation we’re seeing around the globe,” Taubman said. “You have this digitisation trend, which is not slowing down. It’s only speeding up . . . You have the decarbonisation trend. You have the electrification trend. You have so many macro trends where companies need to reposition their business.”

Several other bankers, who asked to speak on background, said the current volatility in the market is likely to put the breaks on dealmaking for some time. But they also added that once valuations come down, cash-rich companies as well as private equity groups sitting on trillions of dollars in “dry powder” of uninvested funds are likely to return to the dealmaking table.

“At the moment most deals I’m working on have been put on pause as sellers and buyers struggle to find agreement on pricing as the share price of their companies keep jumping. But I’m hopeful,” said the prominent rainmaker. “We managed the Covid crisis and we’ll overcome this one too.”

What is unlikely to power the M&A market are acquisitions by special purpose acquisition companies, as the Wall Street phenomenon on the past 18 months has somewhat retreated after a series of scandals and dismal performances. “The number of Spacs coming to market is going to drop to pre-pandemic levels, when nobody cared about them,” said a banker who worked on several transactions in 2020 and 2021 involving companies that list as shells and subsequently find a target to merge with.

Big deals are also not a given, partly because investors are wary of bold M&A at a time of uncertainty. Unilever’s stock dropped significantly after news it had made a £50bn offer to buy GSK’s consumer healthcare business.

“When it comes to big M&A, companies need to be better at communicating with their investor base to ensure they are on board with bold actions,” said Anu Aiyengar, global co-head of M&A at JPMorgan.

The real damper for dealmaking, however, is likely to be coming from Washington, where a new generation of antitrust officials appointed by the Biden administration are determined to revolutionise the rule book.

Jonathan Kanter, head of the antitrust division of the US Department of Justice, said this week that his office will block more anti-competitive deals rather than seek complex remedies that too often fail to protect consumer and curtail certain companies’ market dominance. Microsoft’s $75bn takeover agreement for gaming giant Activision might test the regulator’s appetite to show the new watchdogs mean business.

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It’s been a difficult start to the year for airlines all over the world as the disruption from the Omicron variant has started to hit earnings.

For investors navigating an airline sector looking to recover from the pandemic, the flight path of International Consolidated Airlines Group (ticker: IAG) has been particularly tumultuous in recent months, but it suggests the stock has room to grow.

Shares in the British Airways owner surged 25% in the space of 10 days in September after the White House confirmed it would lift travel restrictions on the United Kingdom and continental Europe, signaling the return of trans-Atlantic travel from November. But the recovery failed to take hold as the Omicron variant entered the fray. IAG remains 21% below its high of early October.

Deutsche Bank analyst Jaime Rowbotham has a Buy rating on the stock with a target price of 2.20 pounds sterling ($2.96), implying a 49% upside. The company has yet to see the benefit of the reopening of the trans-Atlantic corridor, he says.

Citi analysts, led by Sathish Sivakumar, see the company as “the most solvent and sensible way” of playing the North Atlantic recovery over the next 12 months.

The long-haul sector isn’t the same as it was prepandemic, with Norwegian Air and Thomas Cook both exiting the market since. The pair accounted for 11% of seats in the U.K.-U.S. market in 2019, Sivakumar says, and IAG would be the main beneficiary of their exits.

IAG’s lack of exposure to the corporate travel market—just 13% of group revenue—is another reason to like the stock, the Citi analysts say, particularly as business travel looks set to recover more slowly. Sivakumar also has a target price of £2.20 and a Buy rating.

The company, which also owns Spanish carrier Iberia, Irish airline Aer Lingus, and low-cost airlines Vueling and Level, is expected to post revenue of £15.9 billion for 2022, according to FactSet.

That would be a significant improvement on revenue of £6.8 billion in 2020, and the estimated £7.04 billion in 2021, but still some way below 2019’s £21.9 billion.

Analysts covering the stock are pretty bullish, with an average target price of £1.98, implying a 34% upside to Monday’s closing price, according to FactSet.

There is still the Omicron impact to consider. In November, just days before the emergence of the variant, CEO Luis Gallego said he expected North Atlantic routes to reach full capacity by summer 2022, with bookings already close to 100% of 2019 levels.

Rowbotham says he expects that outlook for trans-Atlantic travel to “remain broadly intact,” when the company reports fourth quarter earnings on Feb. 25.

That is not to say IAG won’t feel any impact. Of the major U.S. airlines reporting so far, Delta Air Lines (DAL), United Airlines Holdings (UAL), and American Airlines Group (AAL) each see revenue in the first quarter falling more than 20% from 2019 levels, largely due to Omicron. But they all offered optimism over the months ahead, particularly headed into the summer.

When it comes to IAG, though, Liberum analyst Gerald Khoo noted that renewed travel restrictions “have not yet impacted key long-haul routes” and said he remained optimistic that summer 2022 could still offer a more normal travel environment.

He said long-term structural winners have typically seen accelerated gains following periods of industry turmoil. IAG is one such winner “with an efficient cost base and a balance sheet unburdened by state aid.”

As travelers return, IAG’s stock could have a longer runway for gains.

If you’re inclined to buy the dip in U.S. tech shares, you might consider the crater in emerging market tech stocks.

The Emerging Markets Internet and Ecommerce exchange-traded fund (ticker: EMQQ) is down more than half from a peak last February. There should be some bargains in that wreckage.

“A lot of quality stocks have been thrown out with the bath water,” says Adam Montanaro, investment director for emerging market equities at abrdn.

But which ones? A near-consensus pick among emerging markets managers is Tencent Holdings (700.Hong Kong), China’s social-media and gaming giant. Its shares have slid by a third over the past year. The company has been “much more aligned with the Chinese state” than many peers, Montanaro says, embracing restrictions on gaming by minors. It is also aligning itself with investors by selling chunks of its massive noncore holdings and returning the cash.

“Not much has changed with Tencent’s business model. All that’s happened is the stock has rerated,” says Charlie Dutton, a fund manager for Asia Pacific at Ninety One.

Opinion is more divided on Chinese megacap rival Alibaba Group Holding (BABA). The shares are cheap enough, off 60% since founder Jack Ma picked a fight with Beijing’s state bankers in late 2020. Political clouds still hang low, though.

Alibaba’s financial arm, Ant Group, is very publicly suspected of bribing officials in its home province of Hangzhou. Ant’s prospects, which drove Alibaba’s growth forecasts in better days, grow ever dimmer, says Jason Hsu, chief investment officer at Rayliant Global Advisors. “Fintech was the internet companies’ big secret weapon,” he says. “It does not appear to be in the cards now.”

Two non-Chinese internet superstocks, MercadoLibre (MELI) in Latin America and Sea (SE) in Southeast Asia, stayed aloft longer, then crashed more abruptly. MercadoLibre , which is down by half from a September peak, looks like the better rebound prospect. “We really like MercadoLibre,” says Damian Bird, head of the emerging market growth team at Polen Capital. “It’s cash-flow positive, and is taking market share from businesses that aren’t.”

Tom Masi, co-manager of the emerging wealth strategy at GW&K Investment Management, doesn’t like MercadoLibre. The company’s e-commerce is thriving on commissions up to 20%, which will contract as it faces more competition from heavyweights like Wal-Mart de Mexico (WALMEX.Mexico), he predicts. “Our problem with MercadoLibre is an unsustainable take rate,” he says.

Sea, whose shares have collapsed by two-thirds since November, has a more acute problem: profits receding beyond the horizon as costs of capital rise. “It’s hard to see when exactly that business achieves cash-flow break-even,” Ninety One’s Dutton says. “Maybe 2023, maybe 2025.”

These investors have their own picks beyond the marquee emerging market tech names. Masi is bullish on Baidu (BIDU), the Chinese search engine looking for a second act in artificial intelligence and autonomous driving. “You’re buying the core business at the current price,” he says. Abrdn’s Montanaro likes Chinese business-software provider Yonyou Network Technology (600588.China) and Russian employment site Headhunter Group (HHR).

Managers are paddling through at least two cross currents: Emerging markets may be underinvested after massively lagging behind the U.S. in 2021. And many of yesteryear’s hot tech companies may never make it into the black.

Choose carefully, but don’t brush past the opportunity.

Tighter monetary policies are weighing on speculative assets like crypto, Bitcoin crashed from $43,000 to $33,000 in four days and lost 23% of its value. On Jan. 28, the cryptocurrency was at $37,700, down nearly 50% from its all-time high, reached in November.

Has the plunge gone too far? Bitcoin’s relative strength index implies that the token is oversold, indicating it’s ripe for a bounce. Key support levels, such as its 200- and 50-day moving averages, have long been breached, indicating further downside ahead. Some analysts see a floor at $33,000, though $29,800 is also credible; Bitcoin fell that low in July, then rallied to nearly $70,000. “A lot of investors would back up the truck and open their checkbooks at prices around $29,000,” says Sean Farrell, head of digital asset strategy at Fundstrat Global.

Mike McGlone, senior commodity strategist at Bloomberg, says Bitcoin isn’t far from the 50% discount to its 200-day moving average that marked low points in 2018 and 2020. He notes that $30,000 is a “key support,” and that institutional holders have swooped in at that price. “I would see the tide rising at that level,” he says, expecting Bitcoin to eventually rally to $100,000.

Wilfred Daye, head of Securitize Capital, a digital-asset marketplace, also sees support at $30,000. But if Bitcoinfalls further, its next stop could be $27,000. That’s generally the breakeven price for Bitcoin miners, who receive new coins for processing transactions. What happens if Bitcoin drops that far? “That’s a very scary thought,” he says, since it could usher in another “crypto winter,” a long stretch of deeply depressed prices.