“A Year of Surprises”: Global Capital Markets Recap and 2025 Outlook

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Amaury Guzman: Hello, you're listening to What's The Deal? on our investment banking series on J.P. Morgan's Making Sense podcast. I'm your host, Amaury Guzman from J.P. Morgan's Leveraged Finance desk in New York. Today, I am joined by returning guest Kevin Foley, our global head of Capital Markets, to discuss market development since our mid-year conversation in July, as well as to explore the outlook for global capital markets in 2025. Kevin, welcome back to the podcast. Great to have you.

Kevin Foley: Amaury, great to be back. Thank you for having me.

Amaury Guzman: Alright, why don't we dive right in. Kevin, almost 12 months have gone by in what seems, at least to me, the blink of an eye. But in reality, a lot has happened this year. How would you characterize market developments almost twelve months in?

Kevin Foley: I'd say it's been a year of, I'd call surprises. The economy's been more resilient than we would've thought. The expectations around rate cuts coming into the year were much higher. We got them less of and later in the year than what was expected, obviously, because that ties back to where the economy has been and the resiliency around it. And we obviously got through an election season as well and in a lot of ways, people would refer to as a Goldilocks environment right now. There is belief that you're gonna continue to have some tailwinds from the Fed easing. You've got a view of less regulation under the next administration. That's the belief. People are putting on rose-colored glasses  with regards to what tariffs or changes in immigration policies may be and the impact that may have on employment. And right now there's a very optimistic view about the resiliency of the economy and the ability to continue that and starting to see that in cross debt and equity markets. And I'd say the animal spirits right now are very much alive and strong.

Amaury Guzman: Markets have reacted accordingly, not only in terms of like asset prices where equities have rallied significantly on the credit side where spreads are tight, how would you characterize what the market activity has been on the primary side?

Kevin Foley: So we've been on record levels volumes when you particularly look at the leverage finance market, right in the leverage loan market, to be even more specific. Interestingly, 90% of that activity has been refinancing driven. So we've been very quiet on true new issuance coming to the market. So it's a lot of recycling of capital. It's created a very borrower friendly market because of the lack of new issues, fair amount of cash still on the sidelines. There's a natural inflows that happen from coupon clipping that happens every month with any fixed income product. All of those have created a very favorable environment of demand outstripping supply. And that is driven a heavy refinancing wave. Because we start to think forward to 2025, the question on top of everyone's mind is M&A gonna pick up. And we start to see actual new issuance coming to the market. You can have volumes come down next year, but if the mix shift happens towards more new issuance tied to M&A, that starts to bring that supply and demand a little bit more in balance which will create... It's not necessarily a bad thing, but it can create a little bit different dynamic than what we're seeing right now.

Amaury Guzman: No, that's a great take and I'm gonna come back to some of your references on M&A and the outlook. But before we do, I wanna go a little bit deeper in one of your references that you just had on the U.S. election, specifically, results are now behind us. They include a sweep of Congress. As you mentioned, as the prices have been on the move, equities rallying, rates higher as the market tries to, if you may, anticipate the impact of the policies. How would you assess the balance of risks and opportunities from what you may call the expected policy shift?

Kevin Foley: It's not an easy proposition right now because I think we do have a market that feels like it's priced for perfection. And while there's a lot of reasons to be optimistic and the economic results are supporting that, and there's certainly the optimism with the election behind this, what that may mean on a regulatory front, what that can do from M&A activity and other business activities. You could debate whether a lot of that has already been priced in. And when you look at the multiple expansion that we've seen in the equity markets, that is pricing in a fair amount of growth. You look from a rates perspective and more in the high yield market and the investment grade market, you look at a spreads basis, we are near record lows. The high grade market has taken out its historic lows on a spread levels. The high yield market is several hundred basis points inside its non-recessionary average. So you've got a market that in a lot of ways is priced for a perfect economy and a perfect world. But at the same time, we've got geopolitical concerns that are still out there. We are not entirely sure if inflation has been whipped. There are things that under this new administration that could be viewed as some headwinds for the economy. So while we're optimistic and you could feel good about the outlook, it's not a throw caution to the wind environment.

Amaury Guzman: Yeah, I mean, I just had you walk through the fiscal side of the puzzle, but for instance, if we were to look at it from the monetary side of things, for instance, the Fed has outlined that they will remain data dependent, right, in assessing near term policy decisions. The market itself is pricing additional cuts in December, maybe January, March, who knows? And potentially quarterly thereafter, as the market expects, bring the policy rate down maybe closer to the 300 quarter, 3.5% range. Do you think, these kind of fiscal policy plans throw a wrench in those plans?

Kevin Foley: I think it's... When I started this talking about 2024 being a year of surprises, we obviously saw a lot less cuts than what the market was expecting. And the market was comfortable with that, right? They focus on the fact that here, the market got comfortable with less rate cuts during the course of 2024 because the economic picture continued to be strong. You can definitely have a debate about here, the stimulus that's happening from less regulation, some of its positive sentiment too around the anticipation of that. Is that going to then prevent the Fed from doing some of those policy tightening that is expected, and are they even gonna have the luxury to even debate it? We're still not at that 2% inflation target. There are still things out there that are, by definition inflationary. Take for example, the fact that as we're shifting towards more sustainable energy, that by definition is inflationary. When you look at the investment that's needed on the defense front because of the geopolitical picture, that is inflationary by definition as well. So whether they're gonna have the luxury even easing policy further, is it going to be the challenge that they're facing now, is that gonna increase because of the stimulus that's coming in from other aspects? Yeah, that's gonna be a something we're all gonna be watching in 2025.

Amaury Guzman: Thank you for that, Kevin. I mentioned I was gonna go back to the M&A point. We recently had Alka Gupta and Matt Gell on our podcast discussing tech sectors IPO and M&A trends in EMEA. They were positive about the IPO market in '25 and '26, but they did note that companies are still cautious about M&A due to regulatory uncertainty. What are your thoughts on this outlook? And does this echo with what you're viewing at a global level?

Kevin Foley: So there's definitely a lot more enthusiasm about M&A activity in 2025. I think some of it has to do with a year ago we were sitting anticipating when were we gonna actually see an economic slowdown and anticipation of a recession. That recession never showed up. And so while the economy has slowed down, it's been more resilient. So I think there's an increased confidence in a lot of boardrooms to think about a backdrop that allows them to even think more strategically about what they wanna do. So I think that's a factor. The rates coming down, that's another positive factor. I do think the U.S. economy has been more robust than other parts of the world, in particular when you compare the U.S. with Europe, that you probably would expect to see the U.S. leading the way on the pickup and M&A activity. We've been at near historic lows for the level of activity for private equity shops exiting their investments. So we expect to pick up on that, which will be say the opportunity for strategics to add to their portfolio, to look at other sponsors who may be trying to expand the footprint in this particular industry. There's gonna be a lot of opportunities on that front. So yes, I think that the tailwinds are coming. We're expecting a lot more activity. Some of the concerns that we have, if any of them come to fruition, you can see them derailing that M&A pipeline pretty quickly.

Amaury Guzman: Now, Kevin, as we sit here today in December of 2024 and we look forward to 2025, what are you keeping an eye on for what could be a material risks to markets next year?

Kevin Foley: Well, I think a lot of the risks that we've seen in 2024 remain. I think you're gonna continue to look at the long end of the Treasury curve, where we're gonna continue to be running fiscal deficits. We are gonna have to increase borrowing. At the same time, the buyer base that's been buying Treasuries over the past 5 to 10 years, the banks, the Fed, foreign entities, foreign investors are all pulling back. So despite what the Fed may do in cutting rates on the short end, think of the long end, you continue to have pressure upward because of the supply demand and balance.

Amaury Guzman: Got it. Thank you for that assessment. I think that resonates a lot with what we're hearing from other market participants. Now, the last topic that I wanna review with you today for benefit of our listeners is our upcoming Global Leverage Unions conference, which is happening February of 2025. It is a special edition for all of us at J.P. Morgan as well as for market participants given it's our 30th anniversary of the conference. Why is this your conference particularly special for market veterans like yourself?

Kevin Foley: Well, I think you stare at that number of 30 years, and you look at what's happened in markets over the past 30 years. Pretty astounding when you start to look at a lot of things from dotcom to GFC, COVID, and that's just to name a few. So there's been so much history and development in the growth of the market. The conference in a way has grown alongside with the growth of the market. And so it's kind of watching both grow up and expand over time, and it's become a incredible ecosystem. And I think in a world. We've watched the evolution of road shows become shorter and less in person. The conference has taken on even more of importance because it is definitely a guaranteed couple days where investors and lenders are able to get with issuers and borrowers face to face and really get an update on where things stand in the economy, where things stand with those individual businesses and how they're performing. So we have the good fortune of J.P. Morgan and being a leader in the market and really nurturing that ecosystem. It is thrilling to be a part of that. It's just been fun to watch that grow over the years.

Amaury Guzman: Thank you for that. And what themes are you expecting to emerge from our 30th Global Leverage Finance Conference, upcoming in February?  

Kevin Foley: I think as you think about the themes for next year, I think it's a lot about what we've been talking about. We're gonna continue to gauge the economy. You'll have had the new administration in the office by that time for over a month, maybe we've had some progress on the geopolitical front. We're gonna be debating where Fed policy is. Feels like it's more of the same, but I feel like you take the best pulse when getting out there and hearing the management teams and the CEOs and CFOs of all these businesses and a lot of different industries from across the globe really give you a good insight. And it's a great pull-up at that to understand where we are in a lot of things we've been talking about today.

Amaury Guzman: Kevin, thank you so much for that. We really appreciate your time and you coming and spending your thoughts with us and our listeners and just kind of sharing your insights for what has been a lot of market activity in 2024, as well as your outlook for '25. A big thanks to Kevin Foley for joining me today.

Kevin Foley: Amaury, thank you. And I just say to all our partners out there, thank you for placing your trust in J.P. Morgan, and thank you for a terrific 2024. And we're looking forward to a great 2025 and hope you and all your families have a wonderful holiday season.

Amaury Guzman: And thank you to our listeners for tuning into another episode of What's The Deal. We hope you enjoyed this conversation. I'm your host, I'm Amaury Guzman. Until next time, goodbye.

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