State of the Markets
Q3 2020

A SCATTERED RECOVERY IS TAKING SHAPE

Image of SOTM author, Bob Blee To say the world has been shaken in the past four months is an understatement.

The Great Lockdown caused a global output shortfall of $12.5 trillion. Governments have reached deep into their coffers to inject relief into shocked economies. We've seen companies bolster balance sheets via debt issuance and trim expenses, including layoffs. 

Like many early recoveries, this is a time of contradictions. Growth rounds continue as the late-stage has restored momentum; early-stage companies and small GPs have faltered. Certain sectors are hotter now than ever before; countless others have faced headwinds. The tech IPO window has cautiously reopened, whereas the healthcare window never closed.

As we know, and has become increasingly apparent in recent months, innovation touches every aspect of our lives, revealing an even greater need for inclusivity and diversity in the innovation economy. In this report's Social Impact section, the data describes the lack of diversity among tech companies and venture capital investors and trends around investing for social impact. The gaps are glaring, and we all need to take a more active role to close them.

-Bob Blee, Head of Corporate Finance, Silicon Valley Bank

Macro - Global Economy on Unstable Footing


Comeback Season?

After the worst Q1 in history, equity markets have roared back to nearly pre-COVID-19 levels. The S&P 500’s performance in Q2 marked the best quarterly return since 1998, when markets soared following the summer crash driven by events in Russia and Asia. While markets have recovered, the economic outlook remains bleak. The International Monetary Fund (IMF) estimates a cumulative loss to the global economy of $12.5T over the next two years due to the Great Lockdown — rivaling the size of China’s and Euro Area’s GDP1. This lost output brings into question the robustness of the markets’ recovery.

Comeback Season?
 

Relief Flows into (Parts of) the Economy

In the face of a $12.5T hit to global GDP output, governments around the world have responded by introducing historic stimulus measures. Approximately $11.0T has flowed into the global economy, though the lion’s share has gone to advanced economies. Stimulus received by emerging and low-income economies has, by contrast, been severely disproportionate to their economic damage. ​

This deficit could jeopardize the gains of certain innovation economies, most notably in India, Latin America, and Africa.

Relief Flows into (Parts of) the Economy
 
 

Layoffs Ripple Across Startups

Layoffs have swept the startup ecosystem — with some startups laying off thousands of workers or nearly all their headcount. As a result of layoffs and mandated remote work, employees in the U.S. have left expensive metros, causing rent prices to fall — especially in tech-centric San Francisco. Similar trends have also transpired overseas with London, the U.K.’s major tech hub, experiencing falling rents.​

Increasing adoption of distributed workforces could see emerging metros benefit from an influx of tech talent, which would have cascading effects on company formation, venture investment and the recycling of talent and capital.

Layoffs Ripple Across Startups
 
 

Convertible Debt Spikes

The convertible debt market saw its best quarter ever with more than $57B of issuance in Q2. This pushed total first half issuance to $68B — outpacing 2019’s full year total. Tech led the way with $22B of issuances as notable tech giants — some of which were recent unicorns — tapped the debt markets to add liquidity in size. After shutting down in March, companies raced to issue converts, and this trend only accelerated as credit spreads and equity markets recovered. Additionally, supply dynamics played a role, with low-leverage corporates tapping bond markets to shore up balance sheets.

Convertible Debt Spikes
 
 
FOR THE COMPLETE REPORT

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