Pandemic Winners Could Lead M&A Spree

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Colum McKinley

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Colum McKinley, senior portfolio manager, CIBC Asset Management.

We’ve seen a lot of changes in financial markets over the last year as a result of the Covid pandemic, and we’ve seen this impact our daily lives as well. I think many of us are surprised that here we are, late May 2021, and we’re still in the midst of the pandemic. We’re still battling our way through this as a society.

And so, some of the things that we’re seeing that is giving us positive perspective, I think some of the things that are being priced in to equity markets over the last number of months and quarters, I would point to three.

I would point to the fact that the government stimulus remains in place and remains quite strong. So, we have an exceptionally low interest-rate environment. So, companies and individuals were able to go out and borrow at very attractive rates, which leads to spending and stimulus in the economy.

And we have unprecedented income support in place for both individuals and companies. So, I think that backdrop of government stimulus helping push us through is going to be quite positive. The second is a major trend that we have seen, is consumers have saved substantially during this pandemic, that if you look at saving rates — and this is a trend that has occurred throughout the world — they have skyrocketed to record levels. In Canada, as an example, between 2000 and 2019 — so a very, very long time period — the average household savings rate was less than 4%. In 2020 it was in the low teens; it was approximately 15%. And so, consumers are going to drive the recovery. So, they have saved substantially during 2020, and we all know from our own experience, we have pent-up demands. We can’t wait to get back to going on vacations, going to restaurants, getting back out there, which will mean spending money, which will fuel the economy.

And I think that, prospectively, that is going to be an incredibly powerful trend that will unfold into the latter half of 2021 and into 2022: consumer-led recovery.

The third thing is businesses. And so, we have seen many companies redefine how they do their business, how they approach their market, how they reach out to consumers, and how they work with their employees. Many, if not all of us, are working from home. We met with one company that had a great way of describing this. They said, “Look, if we had studied and talked about, can we have our whole workforce work from home, it would have cost us hundreds of millions of dollars to do the study, and we would have come back with the conclusion that it can’t be done yet.” Yet, the pandemic forced us into that reality. And so, companies had to find ways to be innovative, creative, and work around old structure. Some of that was processes internally, and some of it was a cultural mind shift of whether or not you can work from home.

But all of these things, the whole work from home experience, will drive efficiencies in businesses, and efficiencies in businesses will translate into stronger markets.

We’ve seen companies readdress how they approach customers, so online sales has accelerated. A number of companies across industries would tell us now that our online sales penetration is probably where we thought it would have been five years from now.

And so, we’ve accelerated that process. We knew that that was a secular trend that was taking place. The Covid experience has only pushed it further.

And so, the final part on businesses that we’re seeing — we’ve already seen it take place and we’re going to see more of it in the latter half of 2021 and into ’22 — is mergers and acquisitions. That companies today have the lowest cost of capital they’ve ever experienced. Their stocks are at record highs, and bonds are at record low interest rates. And so, their access to capital and the cost of that capital has never been more attractive. And so, we’re seeing that in M&A action, where companies are looking and saying hey, can we do an acquisition here with that low-cost funding and drive a bigger penetration, bigger market share in our business? So, I think we’re going to see more M&A.

For equity investors, and how we have positioned our portfolios today, are looking for those companies, those businesses that have A) demonstrated their ability to navigate this incredible period of uncertainty over the last year or so that we know that they have the wherewithal to deal with any shocks in the future, but have positioned themselves and have made evolutions in their business to take advantage of the opening and companies that will benefit from the opening, and also companies that we’re not seeing the reopening of the economy fully priced in to the stock price.

I think one example of that today is some of the real estate REITs. When we look at RioCan today, that they are accelerating their mix in their business. So, they’re selling or redeveloping their properties and moving them from being predominantly retail and moving them to mixed use where they will have retail and housing — apartments and condos — on those properties. And so, they have very attractively located properties, they’re most advanced of all of the REITs in the rezoning process and have made changes in their business, may have taken tough decisions to cut their dividends so that they have the financial assets or the financial wherewithal to execute on the strategy.