Corporate Finance Advisory

2020 Vision

Ten Striking Facts for a New Decade | January 2020

Consumer spending is the cornerstone of U.S. GDP, making consumer confidence crucial

to continued economic strength even as businesses are increasingly cautious

Source: Data for CEO Economic Outlook sourced from the Business Roundtable; Data for Consumer Confidence sourced form The Conference Board; Data for GDP and PCE from U.S. Bureau of

Economic Analysis; Q-o-Q GDP growth from U.S. Bureau of Economic analysis

70%

55%

60%

65%

70%

75%

'47

'56

'65

'74

'83

'92

'01

'10

'19

Personal Consumption Expenditure as a % of GDP

U.S. personal consumption expenditures represent 70% of GDP, the highest level on record

Why it

matters

1

Consumer confidence has remained at or close to record highs in recent quarters, supporting continued U.S. economic growth

In contrast, CEO and business confidence levels have been falling for more than a year

With consumer spending more critical to U.S. GDP than at any time in history, will consumer confidence follow business

confidence lower – taking with it economic growth – or will business confidence rebound?

CEO Economic Outlook vs. Consumer Confidence

Recession

(4%)

(2%)

0%

2%

4%

6%

8%

10%

12%

14%

16%

(40)

(20)

0

20

40

60

80

100

120

140

160

Q1'0

3

Q1'0

4

Q1'0

5

Q1'0

6

Q1'0

7

Q1'0

8

Q1'0

9

Q1'1

0

Q1'1

1

Q1'1

2

Q1'1

3

Q1'1

4

Q1'1

5

Q1'1

6

Q1'1

7

Q1'1

8

Q1'1

9

CEO Economic Outlook Index (LHS) Consumer Confidence Index (LHS) U.S. GDP growth (RHS)

1

15% 18%

22%

15% 16% 17% 14% 16% 14% 13%

11% 11% 12% 10% 8% 7%

10% 6%

39% 36% 30%

36% 33% 30%

32% 27% 29% 29%

29% 28% 26% 27%

27% 26% 23%

26%

54% 54% 52%

51% 49%

46% 46%

43% 43% 42% 40%

38% 38% 37% 35%

34% 33% 31%

JP

N

DE

U

ES

P

ITA

FR

A

AU

T

OE

CD

IRL

BE

L

CA

N

NL

D

DN

K

GB

R

US

A

SW

E

FIN

NZ

L

NO

R

High risk of automation Significant risk of change

80%

70%

73%

75%

78%

80%

83%

85%

'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16 '19

U.S. employment remains strong but automation poses a significant risk

U.S. employment participation – Aged 25-541 Jobs at risk of automation

2

Source: Data for U.S. employment stats from U.S. Bureau of Labor Statistics, gig economy data from “Freelancing In America 2019” report published by Upwork, Jobs at the risk of automation from

OECD; 1 Civilian Labor Force Participation Rate: 25 to 54 years

Gig economy grew ~1.5 times faster

than US working population

7.5%

4.8% 4.2%

Gig economy Workingpopulation

Participationrate

2014 – 2019 growth rates

Almost 50% of all jobs in developed countries are at risk of automation or of significant change

Why it

matters

Employment participation has continued to rebound strongly, supporting the low unemployment rate and improving wage trends

Risk of disruption to the workforce may alter the way future economic recoveries occur, particularly if a recession catalyzes automation

New opportunities may come in the form of ‘gig economy’ jobs that have been growing at ~1.5x the pace of broader employment

These ‘gig’ jobs are likely to be less certain, offer less financial security, and come with fewer benefits

Gig economy constitutes

one third of the working

population

2

50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2001 2003 2004 2006 2007 2009 2010 2012 2013 2015 2016 2018 2019

% (

yearly d

ata

)

Central bank easing has taken the world into a negative rates environment3

Source: Bloomberg; 1 Market date as of 12/27/2019

Share of central banks cutting rates (%)

Half the world’s central banks are cutting rates

Why it

matters

Monetary policy is a crucial tool in the central bank toolbox and the trend of how central banks have used their power to cut rates around the world is indicative of the broad economic concerns of 2019

No fewer than a dozen countries now have negative interest rates, which is likely to test the limits of policymakers should additional economic stimulus be necessary

Interestingly, despite the global policy easing witnessed in 2019, rates in many countries ended the year higher, possibly suggesting optimism that a global economic slowdown has been averted – at least for the moment

Countries with negative interest rates by tenor1

Negative yielding debt

Positive yielding debt

1-3 Yrs. 3-5 Yrs. 5-7 Yrs. 7-10 Yrs.10-15

Yrs.15+ Yrs.

Germany

Denmark

Japan

Netherlands

Belgium

France

Finland

Austria

Ireland

Sweden

Spain

Italy

US

3

China’s global influence continues to grow

Percentage of countries whose larger share of imports comes from the U.S. versus from China

2000 2010 2019

Source: Department of Trade Statistics – International Monetary Fund, SWIFT RMB Tracker 1 Full-year 2019 estimates calculated based on YTD August 2019 data; 2 2010 and 2019 figures as of October 2010 and October 2019 respectively

Share of RMB as

global payments currency2

4

United States69%

China22%

No data9%

$0.80tn$0.40tn

United States30%

China63%

No data7%

$1.20tn

$1.77tn

United States24%

China71%

No data5%

$1.55tn1

$2.48tn1

Percentage of total

global payments value2

#35 #6

0.31% 1.65%

Why it

matters

China has transformed itself into a global trade powerhouse, supplanting the U.S. as the larger import source for most countries

The dominance of USD and EUR has overshadowed the growth of the RMB’s role in global trade

China’s stated intent to develop a state-backed cryptocurrency may also have global trade and currency ramifications

With substantial investment around the world – particularly in parts of the developing world, such as Africa – China is well-positioned to see its global economic influence continue to increase regardless of how trade tensions with the U.S. play out

The portion of global payments transacting in Renminbi has increased more than five-fold in the last

decade

4

Dollar values represent total exports from the U.S. and from China

Even as more firms target “BBB” ratings, credit markets maintain an appetite for risk5

Source: J P Morgan, Capital IQ and Bloomberg. 1 Bloomberg Barclays U.S. Aggregate for A, Baa and Ba

The spread between BBB and BB credit costs is the lowest on record

Why it

matters

Firms across industries have migrated to “BBB” investment grade ratings over the last several decades

Credit markets appear relatively unfazed, with the spread between BBB and A credits at typical levels for the last several decades

With the incremental cost of debt for lower BB ratings at historic lows, the trend of taking on higher leverage and lower ratings may

continue, albeit with heightened risk in a late-cycle environment

21%

28%

36%

47%

11%

18%

24%

1990 2000 2010 2019

S&P 500 S&P 1500

% of “BBB” firms in S&P 500 and 1500 Credit spread differentiation by rating over time1

0.6%0.6%

Average over time 0.6% 1.6%

Standard deviation 0.3% 0.8%Recession

(2%)

(1%)

0%

1%

2%

3%

4%

5%

6%

7%

'94 '95 '96 '97 '98 '99 '01 '02 '03 '04 '05 '06 '08 '09 '10 '11 '12 '13 '15 '16 '17 '18 '19

A vs BBB BBB vs BB

5

U.S. corporate EPS growth has been supported by tax reform, low interest rates, and

share repurchases

S&P 500 EPS growth contributors (YE 2010 – Q3 2019)

100%

59%

7%

29%

27% 221%

70%

110%

150%

190%

230%

2010EPS

2019EPS

6

Source: Bloomberg; Note: Calculated on a company-by-company basis, with the median of each growth category displayed; Excludes Real Estate GICS sector; Price return and total return figures

represent 12/31/2010 to 12/31/2019; Figures shown might not tie precisely due to rounding

Just over half of U.S. corporate earnings per share growth over the last decade has been “fundamental”

Why it

matters

Only a little more than half (54%) of S&P 500 EPS growth over the last decade came from top-line growth and margin improvements

The remaining growth (46%) was driven by the stimulus of low rates (monetary policy), tax reform (fiscal policy), and share repurchases

In contrast, European firms have not benefitted from these factors to the same extent

U.S. firms may find themselves challenged to maintain this pace of growth even if their underlying businesses continue to perform

100%

41%6%

7% 2% 156%

70%

110%

150%

190%

230%

2010EPS

2019EPS

STOXX 600 EPS growth contributors (YE 2010 – Q3 2019)

Sales growth Operating margin expansion (contraction) Share count decrease (increase)Tax and interest impact

Price return: 156%

Total return: 209%

Price return: 51%

Total return: 106%

56%

65% 47%

9%

6

Index funds dominate as other strategies fail to differentiate themselves

Source: Bloomberg, Thomson Reuters Eikon as of 12/31/19

Note: Indices used to track performance include: S&P 500 Total Returns Index, S&P 500 Value Total Returns Index, S&P 500 Growth Total Returns Index, S&P 500 GARP Total Returns Index, S&P 500 Dividend & Free Cash

Flow Yield Index, Hedge Fund Research HFRX Global Hedge Fund Index, NYSE Bitcoin Index, , Bloomberg Barclays U.S. Corporate Investment Grade Total Return Index (Unhedged), Bloomberg Barclays U.S. Corporate High

Yield Total Return Index (Unhedged), Bloomberg Barclays U.S. Treasury Total Return Index (Unhedged), LBMA Gold Price PM USD Index, Thomson Reuters CoreCommodity CRB Commodity Index; 1 Tracks the S&P 500

Total Return Index; 2 ‘The great shareholder shift: Developing financial policies for an evolving shareholder base’: https://www.jpmorgan.com/jpmpdf/1320746569306.pdf

7

About one-in-four U.S. large-cap shares is held by an index fund

Why it

matters

The makeup of equity investor bases continues to evolve, with passive index funds representing a greater portion of shareholders

This trend is less surprising when considering that few strategies have substantially outperformed index strategies when taking into account risk incurred (i.e., volatility), and the difference is even more substantial when incorporating fees

The trend towards passive investing is expected to continue; thus, management teams should be prepared for fewer name- or sector-specific investors, greater investor concentration, and the possibility of increasing volatility, particularly around corporate events2

Equity Index1

Value Growth

GARP

Yield

Hedge Fund

Bitcoin

IG Bonds

HY BondsU.S.

Treasuries

Gold Commodities

0%

5%

10%

15%

20%

25%

30%

(10%) (5%) 0% 5% 10% 15% 20% 25% 30%

Annualiz

ed v

ola

tilit

y

10 year total return (annualized)

S&P 500 shareholder style over time Investor style performance vs. risk

6.1% 12.9%

23.8% 15.6%

20.7%

17.0%

0.5%

3.2%

4.2%

8.9%

14.9%

13.5%

5.8%

8.7%

5.4%

4.6%

6.8% 6.9%

20.3%

14.3% 16.0%

38.1%

18.4% 13.3%

2000 2010 Q3 2019

Index

Growth

Retail /

non-reporting

Hedge Fund

Value

GARP

Income / Yield

Other

75%

45%

7

Private company profits have grown at nearly twice the pace of public company profits since the Great

Financial Crisis

Private company profits have grown faster than public company profits

$896$1,058

$1,315$1,397

$1,592 $1,612$1,714 $1,655

$1,629 $1,651 $1,778$1,914

$584 $693 $741 $866 $886 $875 $894 $864 $852 $905 $981 $1,063

$312$365

$574$531

$706$737

$820

$791 $777 $746$797

$851

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Public Private

Aggregate U.S. pre-tax profits ($bn)

11.6x 11.9x 11.1x 12.3x 11.2x 10.3x 13.6x 15.8x 14.2x 14.6x 14.6x 12.9x

161 58 123 150 120 131 129 172 181 185 183 165

9.6% CAGR

5.6% CAGR

Median

Count

Source: Bloomberg, U.S. Bureau of Economic Analysis; Note: Profit figures represent all U.S. corporations; Private profit calculated as aggregate U.S. corporate profits (per St. Louis Fed) less

aggregate of all U.S. public company profits, for each year; Acquisition multiples represent public and private acquisitions of U.S. companies >$100mm since January 2008

8

Public acquisition multiples

Private acquisition multiples

Why it

matters

The last decade saw the emergence of private “unicorns” that garnered significant attention for their ultimate successes (and sometimes

failures) in the public markets

More generally, there has been a dramatic expansion of U.S. private company profits, suggesting that substantial investment and

growth is coming from outside the public capital markets

With private capital ‘dry powder’ also at record highs, the trend of private company investment (and growth) is likely to continue well into

the next decade

9.4x 8.1x 10.1x 12.1x 10.4x 11.9x 13.5x 12.8x 12.2x 11.5x 10.8x 11.3x

23 18 15 21 31 22 38 85 71 23 51 57

Median

Count

Recession

8

TJCARecessionHIARecession

U.S. corporate tax reform makes a small dent on total receipts but levels the playing field

$2.0 $2.0$1.9

$1.8$1.9

$2.2

$2.4$2.6 $2.5

$2.1 $2.2$2.3

$2.4

$2.8

$3.0

$3.2 $3.3 $3.3 $3.3$3.4

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Corporate income tax

Individual income tax

Social security

Other

TJCA

U.S. federal tax revenue ($tn) Average corporate tax rates (%)

Source: St. Louis Federal Reserve Bank, U.S. Bureau of Economic Analysis; The Tax Foundation; Note: HIA stands for Homeland Investment Act, TJCA stands for Tax Cuts and Jobs Act; 2019

figures represent YTD

Recession

9

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

United States

United Kingdom

European Union

Asia-pacific

HIARecession

Prior to tax reform, corporate taxes accounted for ~9% of total U.S. tax receipts; in 2019 that number is

expected to be ~6%

Why it

matters

Despite the substantial amount of time and attention given the U.S. tax reform, corporate tax receipts have historically only accounted

for a small portion of overall government revenue

For a relatively modest overall impact to U.S. revenues, U.S. tax reform was crucial in re-aligning the U.S.’s competitiveness on the

global stage

10% 8% 8% 7% 10% 13% 15% 14% 12% 7% 9% 8% 10% 10% 11% 11% 9% 9% 6% 6%Corp.

% total

9

(2.9%) (3.0%)

(4.6%)

1.2%

(0.8%)

(2.7%)

(0.2%)(1.3%)

1.3% 0.5%

(2.9%)(2.2%)

(3.6%)

1.1% 0.5%

3.9%

(2.3%)(1.2%)

1.3% 2.4%

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

US ESG Total Return vs. S&P 500 (%) Europe ESG Total Return vs. MSCI Europe Index (%)

ESG strategies are attracting capital, but excess returns have been elusive

$13.8

($12.3)

$6.2

$32.2

$18.0

($6.3)

$11.6 $29.3

$7.3 $18.2 $40.7

($40.9)

$35.8

$76.6

$23.5 $1.1

$42.9

$136.5

$38.7

$71.0

($200)

($100)

$0

$100

$200

$300

$400

$500

($100)

($50)

$0

$50

$100

$150

$200

$250

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Annual NA ESG Inflows ($bn) Annual Europe ESG Inflows ($bn) Cumulative NA ESG Inflows ($bn) Cumulative Europe ESG Inflows ($bn)

Source: Bloomberg as of 12/31/19, Lipper

Note: Inflows correspond to equities and bonds; Europe ESG returns based on MSCI Europe ESG Leaders Index; US ESG returns based on MSCI USA ESG Leaders Index

10

U.S. ESG equity strategies have underperformed the broader market in seven of the last ten years

Why it

matters

While Environmental, Social, and Governance (ESG) investment strategies have attracted capital, particularly in Europe, these

strategies are yet to deliver consistent market outperformance

ESG considerations should be important aspect of Board and senior management decision-making, as more consistent outperformance

of ESG investment strategies are likely to further increase investor attention on these issues

Cum

ula

tive n

et

inflow

s

Annu

al in

flow

s

10

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