Global Liquidity Spurs Asset Prices, Kick-Starts Deal Making

For more than a decade, the world has been awash with cash thanks to accommodating monetary policies and generous government programs aimed at bolstering economies ravaged first by a financial crisis and then a pandemic. This massive liquidity has also led to significant asset price increases.

Some of the numbers are eye-popping:

• Residential real estate, where homebuyers find often unbearably competitive markets, has seen significant price appreciation. The Case-Shiller 20-City Composite Home Price Index has risen by over 13% in the past year alone.
• Equity markets have reached expensive levels with traditional value metrics, such as price to earnings (P/E) and price to sales (P/S), reaching historically high levels.
• Crypto currencies have captured the public’s attention. Bitcoin pricing approached $65,000 in mid-April, a seven-fold increase from the price at the middle of 2020 (prices have corrected significantly in recent weeks). The exuberance across markets can be daunting.
• Oil prices have rebounded from about $35 a barrel at this time last year, closing above $70 on June 11.

Liquidity is also driving activity in the corporate sector where mergers and acquisitions (M&A) are accelerating. Companies are doing deals at a rapid clip so far in 2021, and deal counts have recovered from a low in the second quarter of 2020. Total transaction value in 2021 reached $2.4 trillion by June, with monthly transactions worth more than $500 billion occurring in March, April and May.

Corporations clearly believe these investments will help sustain and extend their growth. For private-equity and venture-capital investors, M&A activity provides welcomed exits for past investments, allowing for liquidity within portfolios. AMG expects increased M&A activity to continue the rest of year.