Apr 19, 2021 | 7 min read

Digital Insights Newsletter: April 2021

Riding the Rebound

As of April, following unprecedented difficulties in 2020, the global economy is rapidly heating up, creating both opportunities and challenges ahead.

Following unprecedented difficulties in 2020, the global economy is rapidly heating up, creating both opportunities and challenges ahead. By many measures, we’re seeing an unprecedented rebound in demand for goods and services, a harbinger of a return to pre-pandemic levels of economic activity. The flip side is a new set of constraints to global supply chains, manufacturers, and multiple industries.   

Financial markets are surging, with the S&P 500 and other indexes regularly marking new highs, as record levels of M&A propel sentiment to bullish levels. According to MergerMarket, M&A activity is off to the hottest start to a year on record, with deals in the first quarter of 2021 representing $1.16 trillion in transactions, surpassing the heated activity of even 2018 and 2019. 

The global IPO market is similarly robust, with 762 deals in 1Q21 raising over $200 billion – with just the first quarter representing nearly 2/3 of the value of all 2020 activity.  The SPAC wave also shows no signs of abating, with M&A tied to SPACs increasing from 19.5% of all deal volume in 4Q20 to 23.6% in 1Q21. The flush pockets of recently funded SPACs (which typically carry two-year limits to find an acquisition or money must be returned to investors) are helping to drive competitive bidding for attractive targets. 

 

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Hoards of Cash on the Sidelines Ready to be Put to Use

It’s not just SPACs with cash on hand; consumers are sitting on $5.4 trillion in excess savings globally since the start of the pandemic. Moody’s expects at least 20% of this excess savings will be spent in 2021 in the U.S., adding 2.$% to Real GDP growth in 2021 (forecast to be 6.4%). Retail spending on stores and restaurants grew 9.8% in March, the biggest jump since last May. The demand rebound is driving factory output increases as well; the Federal Reserve reported that U.S. manufacturing output increased 2.7% in March. Notably, hiring is accelerating across the board, picking up particularly in hard-hit sectors like hotels, restaurants, and entertainment.

 

Feeling the Strains of a Rebound

In 2020 many firms had to deal with steep and sudden declines in sales, and in 2021 the comeback is creating new categories of challenges. To the relief of many and the surprise of few, there is now a surplus of toilet paper, but the “bullwhip effect” (the phenomenon of demand variability increasing as you go upstream in the supply chain) creates imbalances across industries. A lumber shortage is causing pain for builders and contractors with the spiraling cost of lumber. First and foremost impacting Digital Industry is the global shortage of semiconductors, affecting manufacturers of components, electronics, automobiles, and many other goods across the globe.  The hyper-connected world needs semi chips everywhere, and the shortfalls are unlikely to be resolved in the near term.  The combinations of a spike in demand, freak events that have caused supply chain disruptions, ongoing trade frictions between the U.S. and China have caused many manufactures to stockpile chips. 

 

Demand Planning Critical to Avert Shortages

The downstream impact is being felt across many sectors. Automakers have been forced to shut down assembly plants due to the shortage of components, with production levels expected to be impacted by as many as 1.3 million cars. New computers, gaming systems, and T.V.s are increasingly hard to find. 

 

Rental cars, for instance, are increasingly scarce at airports as travel resumes – rental car companies that shed their inventory in 2020 are now finding it increasingly difficult to replenish their fleets. A recent survey of trucking firms found that 73% have experienced delays in taking delivery of new vehicles due to the semiconductor shortage. Not related to semis, but still critical to the supply chain has been the backlog of ships at busy ports as shipping rates are skyrocketing as well. 

We do appear to be on the right side of the “V-shaped recovery,” and a bit of whiplash is inevitable. However, the lessons learned over the past several years around digital transformation will prove critical in navigating the speedbumps of a welcome recovery.


 

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WEBINAR

Venture Industrialist:
Digital Industry Investing

Find out how emerging technologies for Digital Industry are driving new models and opportunities in VC investing.


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