The easing of key economic and political risks and the emergence of positive macroeconomic deal drivers will accelerate global deal activity in 2018, reveals the third edition of the Global Transactions Forecast issued by Baker McKenzie.

2017 has been a period of apprehension for global dealmakers and while economic growth has certainly slowed, the cliff-edge some were predicting has failed to materialize. Following on the momentum created in the second half of 2017, The Global Transactions Forecast, developed in association with Oxford Economics, predicts a cyclical peak in 2018 for several macroeconomic and financial deal drivers, with 2018 marking the high point of the deal cycle for the world's largest transaction centers.

The forecast highlights why investors around the world are feeling increasingly confident as 2018 approaches, with appetites strengthened by positive trends such as more-buoyant world trade and economic growth, elevated equity valuations, and the prospect of cheaper financing in emerging markets.

"After a few soft patches in 2017 we have a more optimistic outlook for the global economy and dealmaking in 2018, as long as the brakes are not put any further on global free trade. We see an uplift in both M&A and IPO activity as dealmakers and investors gain greater confidence in the business prospects of acquisition targets and newly-listed businesses," said Paul Rawlinson, Baker McKenzie's global chair. "However it's not a done deal, with the threat of a Hard Brexit and a NAFTA collapse both still very real. Business will need to continue to make the case for liberal trade and investment frameworks."

M&A outlook

Baker McKenzie's previous forecast in January 2017 predicted a flat M&A market this year with a modest decline in global M&A values, from $2.8 trillion in 2016 to $2.5 trillion in 2017.

Michael DeFranco, global head of M&A, said, "2017 played out as we predicted and there have been a number of positive developments in the global economy that have led to the forecast for global M&A values in 2018 to be increased from our previous forecast of US$3 trillion to US$3.2 trillion. This would represent the 3rd highest yearly deal value since 2001 and the 2nd highest since the financial crisis in 2008."

In addition to positive economic developments, underlying strategic drivers like the search for growth and yield, the use of consolidation to achieve synergies, the deployment of unspent capital, and the use of M&A to drive business model changes will aid the increase of M&A activity in 2018.

According to the report, a range of factors will cool deal activity from 2019 onwards particularly in developed markets, including higher interest rates, a cyclical easing in global trade and investment growth, and a correction in equity prices back towards fundamentals. The forecast predicts M&A values to drop to $2.9 trillion in 2019 and $2.4 trillion in 2020.

M&A accelerated in the consumer, energy and basic materials sectors in 2017, bolstered by megadeals. Given the potential for stronger global consumer spending in 2018, the report predicts even more dealmaking in the consumer sector in 2018, rising to US$633 billion, along with finance, which is forecast to reach $616 billion.

While underperforming in 2017, the pharmaceutical and healthcare industry is positioned for higher levels of dealmaking due to long-term trends such as aging and demographics. The technology and telecommunications industry also dropped in 2017 but several trends of embedding new technology across sectors, plus activist investment in technology firms by emerging markets such as China and Saudi Arabia, suggest that deal values will rebound in the next two years.

"The pervasive expansion of emerging technologies across industries, including foodtech, fintech, and the automotive sector, will drive M&A activity as we expect to see more cross-sector deals involving technology in the next couple of years," added DeFranco.

North America and Europe are forecast to reach cyclical peaks for M&A and IPO activity in 2018. North America M&A activity is forecast to pick up to $1.5 trillion, a 15 percent increase over 2017, and domestic IPOs are forecast to reach an all-time high of $78 billion in 2018, a 77 percent increase over 2017. Europe M&A activity is forecast to reach US$856 billion, a 34 percent increase over 2017, and domestic IPOs to US$60 billion in 2018, a 58 percent increase over 2017.