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Economic Monitor June 2021

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Economic Monitor June 2021 Economic Monitor Importance of ESG considerations in investment decisions Deloitte Economics: Q2-2021 Financial Advisory Overview from Deloitte Economics Deloitte Economics is ready with a new The second section sheds light on the M&A monitor that provides an overview over the environment of the Nordic countries. A recent economic development and outlook. The historical overview of the market valuation new monitor will replace our coronavirus multiples and market risk premiums provides impact monitor and will be updated quarterly. insights into investors’ risk appetite and Post-pandemic recovery of Uplift in equity markets, high M&A activity GDP growth rates and historical high valuations The monitor consists of two fixed sections and a behaviour during and after the outbreak of special economic theme from the past quarter. COVID-19. It shows that the pandemic has led to a significant drop in market valuations The first section provides benchmark analyses of followed by an even larger increase, resulting in a number of economic metrics such as GDP historical high valuations. Market risk premiums growth, equity markets, interest rates and have likewise dropped, indicating an overall inflation rates. It furthermore assesses the Increase in overall property prices, Increasing ESG importance for increase in investors’ risk appetite. Additionally, development of consumer and business especially in the capital investment decisions the Nordic M&A activity is continuously high confidence, Danish export, consumer spending with the TMT sector outperforming other and property prices before, under and after sectors based on deal count in Q1 2021. COVID-19. The numbers show that the interest rate and economic cycle have been highly The last section, and the special theme of this Majbritt Skov Peter Lildholdt correlated with consumer behaviour and issue, is how ESG considerations are of high Partner, Chief Economist Vice President confidence. It further shows that the property importance when investing. Analyses show that +45 30 93 54 71 +45 40 35 25 36 price index has been continuously increasing significant value creation from ESG impacts can [email protected] [email protected] throughout the period, with no significant be seen in both the operating and COVID-19 impacts. The same goes for financial aspects of an investment target. ESG bankruptcies and unemployment rates in factors are found to consistently have a positive Dylan Price Ida Steinbring Jørgensen Denmark. However, consequences of phasing impact on returns in capital markets compared Senior Associate Associate out corona related support schemes are still not to traditional factors, making ESG +45 60 57 79 17 +45 28 15 78 61 fully reflected in the figures. considerations essential in investment relations. [email protected] [email protected] Page 2 Deloitte Economics © 2021 Table of contents Economic trends ……………………. 4-12 M&A environment …….…………… 14-18 ESG & sustainable investing ……. 20-22 Deloitte insights .…………………….. 24-25 Economic trends | Gross Domestic Product (GDP) After the rebound of the economy in Q3 2020, the real growth rate has returned to either a modest or a negative level following the second waves of the pandemic in many countries Real GDP growth from same quarter of previous year1 Negative growth rates of GDP were seen globally when the 4% pandemic struck in Q1 2020 but have somewhat recovered in Q3 2020. This is a sign of resilience in modern economies compared 2% to the previous GFC recession recovery and the Greek debt 0% crisis. (2%) DK (4%) EU (6%) FI In Q1 2021, all Nordic countries realised negative growth. The (8%) Danish GDP declined by 1.7%, mainly driven by declines in the NO (10%) transport-, services-, and manufacturing and construction SE sectors. The decline should be seen in the light of the second (12%) US wave of the pandemic, and the outlook in general is positive. (14%) Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Danish GDP by sector2 The real GDP growth of the 27 European countries (excluding the United Kingdom) experienced negative GDP growth of 4.5% 200.000 in Q4 2020, which improved to a GDP decline of 1.7% in Q1 2021 Fishery, agriculture and mining Services sector Real estate on the back of strong fiscal initiatives and loosening of Manufacturing and construction Transport Public administration restrictions. 150.000 100.000 The US economy displays a similar pattern to the Nordic countries and produced a recovery in Q3 2020. However, the 50.000 United States managed to realise a real growth rate of positive 0.4% in Q1 2021. 0 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Note: 1) GDP measured using the expenditure approach; 2) Gross value added, seasonally adjusted (DKKm) Source: OECD, Statistics Denmark Page 4 Deloitte Economics © 2021 Economic trends | Equity markets The European equity market is displaying a positive development, especially within the Technology and Transportation sectors, while government yields are increasing Equity markets: Sectoral indices in Europe1 200 European equity markets continue to show some sector Transportation Technology divergence, but have an overall total improvement, signalling Healthcare Energy that the COVID-19 crisis has discriminated in the negative effects 150 to certain sectors. Financial services 100 Since the beginning of January, European Transport, Technology, and Financial indices are up by 23%, 23% and 7.3%, respectively. Energy shares are up by 9.3% since January 2021, while 50 Healthcare stocks have only increased by 2.3%. This may be a result of the high expectations for the Healthcare sector due to 0 COVID-19. Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 In Q1 and Q2 2021, the 10-year government bond yield has Yield on 10-year government bonds increased significantly, although it remains negative in the EU 4% EU NO and Denmark. As the demand for treasury bonds increases, it is US SE expected that an increase in inflation is projected to correspond 3% with these fears. UK FI 2% DK The 10-year government bond yield is now at a level that is close 1% to where it was when the pandemic started hitting the economy last year. The 10-year yield is expected to realise further 0% moderate increases, as inflation picks up, but is not expected to harpoon the stock market. (1%) Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Note: 1) Index – January 2020 = 100 Source: Capital IQ Page 5 Deloitte Economics © 2021 Economic trends | Interest rate & inflation Central banks have increased the interest rates, and an intensified rise in the inflation rate is observed overall Central bank interest rate There was an overall increase in central bank interest rates in Q1 4% 2021. The Danish and the Finnish interest rates have remained DK FI SE EU NO US negative in 2021, although there has been a small increase in 3% both rates. This change illustrates a tightening of the monetary policy and reversal of recovery strategies. 2% 1% Equivalent to the central bank interest rates, inflation rates increased in Q1 2021. Norway and the United States took the 0% lead in having the highest interest rates and inflation rates. (1%) Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Inflation rate The Danish interest and inflation rate are currently the lowest 4% DK FI SE among the peers being a result of an extremely loose monetary policy. It remains to be seen how hard the correction will need EU NO US 3% to be if there are inflationary concerns. 2% 1% It is expected that interest rates and inflation continue to increase concurrently with the economy recovering from the 0% pandemic. (1%) Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Source: OECD Page 6 Deloitte Economics © 2021 Economic trends | Consumer & business confidence Danish consumers and businesses have regained confidence in the future, as the vaccine is being rolled out and as the ending of pandemic is within sight Consumer confidence in Denmark The consumer confidence in Denmark dropped significantly in 15 April 2020, but quickly managed to bounce back. Thus, the index remained negative throughout the remainder of 2020. 10 Consumers have gained higher confidence in 2021, with a steep increase in March. In April, consumer confidence turned positive 5 for the first time since the COVID-19 outbreak. 0 Similar to consumers, business confidence decreased as the (5) pandemic struck. However, confidence was regained fast due to the rapid fiscal response, enabling the index to approach 100 by (10) the end of 2020. (15) Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Business confidence in Denmark1 After gaining momentum in the second half of 2020, business confidence has slightly recovered in Q1 and Q2 2021 as a result 120 of an easing of the restrictions incurred in December 2020. In 110 March 2021 the index was at 101.2, reaching over 100 for the first time since the pandemic and has only been increasing since. 100 90 80 The increase in consumer and business confidence is resulting from a stronger recovery than expected and has resulted in high 70 returns on capital markets. The increased confidence signals a 60 positive outlook for the Danish economy.
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