7th December 2023

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Business Industry and Financial

Investment banks optimistic about US as Asian slump continues –

Investment banks in both the US and Asia-Pacific have seen a shrivelling up of deal activity since the dizzying heights of 2021. However, with fears of a global recession starting to subside, a slowing of interest rate hikes and a significant amount of private equity (PE) capital waiting to be deployed, banks are “cautiously optimistic” about an investment banking revival.

“North America seems to be on a positive trajectory; however, this is yet to materialise to the same extent in Asia-Pacific,” says Ola Bennerholm, managing director at Boston Consulting Group (BCG) in Hong Kong. “Greater China is still subdued due to macroeconomic uncertainty. However, north-east Asia, India and south-east Asia are seeing higher activity.”

According to BCG’s data, North American merger and acquisition (M&A) deal value development went from a quarter-on-quarter contraction of 18% in the first quarter of 2023 to an increase of 28% in the second quarter. The corresponding numbers for Asia-Pacific were –20% in the first quarter of 2023 to –5% in the second quarter.

The latter’s investment banking slump will continue to be driven by dampened market conditions in China and India. In the first six months of 2023, M&A activity dropped in the region’s two biggest markets by 27% and 75%, respectively, according to data from Refinitiv. However, there are some bright spots in south-east Asia, with smaller markets such as Thailand and Vietnam leading deal activity on the back of major investments from South Korea and Japan.

without the uplift from China … M&A activity has greatly reduced in the region

Ken Shih

“Asia isn’t particularly stagnant, but clearly without the uplift from China due to geopolitical tensions and growth concerns, M&A activity has greatly reduced in the region,” says Ken Shih, head of wealth management at Saxo Markets in Hong Kong.

Cautiously optimistic

With the recent conclusion of the US second-quarter earnings season, investment banking deal activity is predicted to pick up in the remainder of 2023 amid better-than-expected results. JPMorgan’s $1.5bn investment banking revenue beat the $1.42bn estimate; Bank of America also announced a 7% rise in investment banking fees, to $1.2bn.

“The CEOs of Morgan Stanley and Goldman Sachs said there are some green shoots in terms of investment banking activity,” says Matthew Toole, director of deals intelligence, data and analytics at London Stock Exchange Group. “We’ve seen an uptick in US initial public offering activity and that generally drives confidence in the market.

“Based on the calls and transcripts, there does seem to be a view that the deal activity pipeline is building,” he adds.

While US banks are leading the recovery, the country’s markets were also the first to tumble following market heights seen in 2021. In 2022, Asia-Pacific deal values held up roughly six to nine months longer than North America deals, which had already gone into reduction starting in the fourth quarter of 2021. Asia-Pacific deal activity only turned negative in the third quarter of 2022.

PE capital reserves

Experts have also suggested that incentives from the government’s Inflation Reduction Act, coupled with a significant amount of PE dry powder, will also drive deal activity further in both the US and then eventually in Asia-Pacific.

“Asian M&A activity will come back, but we might see this happen slightly later in the cycle versus the US,” says Mr Bennerholm at BCG. “PE firms are sitting on unprecedented amounts of dry powder with record fund sizes being announced, and with a subdued deal activity in the past 12 to 18 months, there is a lot of capital ready to be deployed in Asia.”

Mr Bennerholm tells The Banker that a significant number of discussions are ongoing across India, north-east Asia, south-east Asia and — to some extent — Australia and New Zealand on upcoming deal activity. The discussions are driven by the rerouted focus of investment flows from mainland China due to macroeconomic uncertainty and geopolitical tensions.

Mass layoffs to cool off

Investment banks in the US and across Asia-Pacific have been reducing staffing levels over the past year, but the large cuts are beginning to subside as deal activity begins to pick up again.

Goldman Sachs, Morgan Stanley and Citi are among those that announced major layoffs earlier this year. In the first quarter of 2023, Goldman Sachs’s headcount fell by 6.4%. The reductions follow Wall Street’s hiring spree post-pandemic, which could not be sustained amid dwindling deal activities.

“Banks are seeing this shift in momentum for deal activity in the US and, with expectations that activity will bounce back in Asia too, further significant downsizing of staff is less likely,” says Mr Bennerholm.

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