M&A boom in 2024 won't just be 'one-year catchup': Strategist

M&A activity has the chance to surge in 2024 after dealmaking receded drastically last year. Morgan Stanley Chief Cross-Asset Strategist Andrew Sheets explains his forecast for mergers and acquisitions this year, expecting the market to be unhindered if the Federal Reserve doesn't cut interest rates as long as inflationary pressures continue to cool.

"There's some important catch-up as I think we see from markets, increased confidence in the soft landing and a better economic outcome, that's going to catch up to corporate board rooms," Sheets tells Yahoo Finance. "But there's also a longer-term picture here that's quite exciting. There's activity that we think private equity players need to do. There are other forces that we think will be making up for multi-year deficits and there's some interesting regional trends."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

BRAD SMITH: Dealmaking is expected to show new signs of life this year. Morgan Stanley making the call that M&A activity is set to rebound not only in 2024, but in years to come. For more on the M&A comeback, we've got Andrew Sheets, who's the Morgan Stanley chief cross-asset strategist.

Andrew, great to have you here on with us on "Yahoo Finance" today. First and foremost, what is really the invigoration behind this and the M&A forecast?

ANDREW SHEETS: Yeah. Great. It's great to be here. So I think there are both cyclical and structural drivers that are going on here. If we think just about rebounding from last year, dealmaking activity in 2023 was exceptionally low relative to the size of the economy. Maybe, the lowest that we've seen in 30 years.

And so there's some important catch up, as I think we see from markets increased confidence in a soft landing and a better economic outcome. That's going to catch up to corporate boardrooms.

But there's also a longer-term picture here that's quite exciting. There's activity that we think private equity players need to do. There are other forces that we think will be making up for multi-year deficits. And there are some interesting regional trends. So this isn't just about a one-year catch up. We also think this is a longer-term story.

SEANA SMITH: Andrew, if we don't see the Fed though cut rates before the end of the year. How much is that going to then delay the recovery that you're expecting?

ANDREW SHEETS: So I think it really depends on what is the economic environment behind that delay. I think if the Fed is not cutting rates this year, because the economy is even stronger than expected, I think that could peacefully coexist with more M&A activity, as corporates get increasingly confident about the economic backdrop as fears of recession recede even further.

And then importantly, we do think many private equity investors, the average amount of time their portfolio companies have been on their books remains historically high, that they will face pressure to act regardless of what the Fed is doing.

So I think it can still survive that scenario. Now, if inflation is high, and that's the reason why the Fed has not been cutting rates, that could be a bigger challenge. But I think if the Fed isn't cutting because growth is better than expected, we'd still think M&A recovers.

BRAD SMITH: For investors out there that are trying to pick and choose or get ahead of some of the biggest M&A opportunities, where are the sector hotspots that they should be, perhaps, keeping a close eye on?

ANDREW SHEETS: So I think there are a couple of places. I think the usual suspects like health care and technology. Real estate is an interesting one. And that's also a sector where our analysts see lower regulatory hurdles to M&A than other sectors.

And as part of our work, we really leaned heavily on Morgan Stanley's global team of equity analysts to really dig into a lot of these themes. And there's some really interesting regional stories as well. We think M&A, which has been in a huge, almost decade long, drought in Europe is picking up in a big way.

That's actually the region where Morgan Stanley equity analysts are most optimistic on more M&A activity versus consensus. So I think that could be one of these factors, where sentiment on Europe is certainly lower than other regions. But where M&A activity, I think, is more likely to surprise positively.

SEANA SMITH: Andrew, the pushback that we've seen on the regulatory side, the crackdown on antitrust, is that at all going to have more of a freeze or maybe chilling effect on the M&A pipeline?

ANDREW SHEETS: So I think that is a really important factor to flag. I think that's one of the risks to this rebound. But when we sit down with our analysts and we think through these issues, those regulatory forces, first, I think differ some depending on what sector that we're looking at.

Two, I think when we ask our analysts holistically to think about the risks, even factoring in the regulatory risks, 50% of our industry teams globally still see M&A increasing. And then, also, we think that this is an area where under either of the likely presidential outcomes, we think companies could, ultimately, get more comfortable activity.

The companies have now seen have more experience with the Biden administration and their approach to M&A. There would have been previous experience with the Trump administration's approach to M&A.

So these might be bumps. But we don't see regulation as a major impediment to this multi-year rebound.