The Return of Global Inflation

1. Investment Research WHITEPAPER The Return of Global Inflation

2. The Return of Global Inflation The Return of Global Inflation Businesses started raising their prices in 2021 at a rate not seen in decades. Globally, prices have been increasing for a wide range of goods, including poultry, diapers, and petrol over the past year. A key indicator of inflation in Singapore reached an almost 14-year high this year, along with a surge in UK retail and wholesale prices. In the interim, a growing number of central banks worldwide kept raising interest rates. The world economy is entering what could turn out to be a protracted period of weak growth and elevated inflation, according to the World Bank. Many of the factors driving inflation, including compounding the harm from the COVID-19 pandemic, the Russian invasion of Ukraine, climate change, supply chain constraints from the pandemic, and higher food prices after severe storms and drought hurt harvests, have made the slowdown more pronounced. The Organisation for Economic Cooperation and Development (OECD) anticipates that inflation will reach its pinnacle in 2022, with advanced economies experiencing an average increase of 5.5%, and the 38 member nations experiencing an increase of 8.5%, before beginning to decline in 2023. Global inflation rates have risen since 2020 Selected countries, each country on its own scale, March 2022 US Japan Canada 8.5 1.2 6.7 Australia Nes Zealand UK 6.9 7.0 5.1 Global annual inflation, 2010-2020 Percentage France Germany Spain 8 4.5 7.3 9.8 7 6 Italy China Brazil 5 6.5 11.3 4 1.5 3 ‘20 ‘21 ‘22 ‘20 ‘21 ‘22 ‘20 ‘21 ‘22 2 Average world inflation 2010-2020 is 2.9% 1 Sources: Office for national statistics 0 2010 2012 2014 2016 2018 2020 2022 Sources: UN DESA estimates and forecasts. Note: Data for 2022 are projections. Data excludes the Bolivarian Republic of Venezuela. 2

3. The Return of Global Inflation Sky-high inflation in the U.S. • Among the major economies, the U.S. economy was the worst hit. According to OECD, prices increased at a pace of 4.7% annually in 2021, outpacing other advanced nations in the Group of Seven (G7). For instance, inflation in the UK was only 2.5%. US inflation had accelerated to 9.1%, the highest in 41 years in June 2022. The sky-high inflation rates confirm that pricing pressures are pervasive and rampant across the economy, continuing to erode consumers’ purchasing power and trust. The more-than-expected increase in the U.S. inflation rate in June highlighted the ongoing price pressures, which will put the Federal Reserve on track to raise interest rates further. • According to data released by the Labor Department, the consumer price index (CPI) increased by 8.5% in 2022, from the previous year, a broadly based increase. As a result of significantly rising energy prices, tighter financial conditions, and additional supply interruptions brought on by the invasion of Ukraine, the U.S. GDP is predicted to fall to 2.5% in 2022, 1.2 percentage points less than initial predictions. Growth is anticipated to slow down even more, to an average of 2.2% in 2023–24, as additional monetary policy tightening and the continued withdrawal of fiscal support weigh on economic activity. Although the inflation is anticipated to reach its peak in mid- 2022 and then gradually drop, it is anticipated to stay over its objective of 2% throughout the projected period due to ongoing wage pressures brought on by a tight labor market. • • • • But why did the U.S. perform worse? I. High demand during constrained supply increased prices High demand was fueled by the unprecedented US$5 trillion in spending that the U.S. government authorized to protect individuals and businesses from the pandemic’s economic blow. The aid, which included direct checks to households, helped consumers to keep shopping by bolstering family finances. Orders for goods such as furniture, vehicles, and gadgets increased as consumers diverted money that might have otherwise been spent on dining out and traveling. As a result of the exceptionally high demand and supply problems due to the pandemic, prices were increased. American the chronic, demand-driven inflation, which is significantly higher than nominal wage increases. The most convincing proof that the U.S. is experiencing demand-driven inflation is seen in the labor market. With record numbers of resignations and job opportunities, the labor markets in the country may be more constrained than ever. workers are lagging because of Personal spending during the pandemic Monthly change in percentage April: January: 15 First month of CARES Act payments $600 stimullus checks July: 10 Enhanced Child Tax Credit program rolled out 5 0 -5 March: -15 $1,400 stimulus checks Apr’20 Aug’20 Dec’20 Apr’21 Nominal spending Aug’21 Dec’21 Apr’22 Dec’19 Real spending (Inflation adjusted) Source: BEA, RSM US 3

4. The Return of Global Inflation The Fed’s changes to the federal funds effective rate since 2017, by basis points II. Sluggish response from Fed Others countered that price hikes would be ‘transitory’ and disappear once the pandemic-related supply chain problems subside, despite concerns that the relief packages would cause inflation from being raised before they were passed. Even though the inflation-related expectations in the U.S. started to change, the Fed was slow to react to the price increases. This change in expectations is what turned a temporary situation into a persistent one, but the Fed was again slow to act. The Fed launched its own stimulus policies at the beginning of the pandemic. Despite wage growth being slow, rising prices weren’t widely felt as a cost-of-living crisis in 2021, since U.S. households were supported by the stimulus checks. Dec ‘17 Dec ‘16 Mar ‘17 Jun ‘17 Dec ‘17 Mar ‘18 Jun ‘18 Sep ‘18 Dec ‘18 Aug ‘19 Sep ‘19 Oct ‘19 Mar ‘20 Mar ‘20 Mar ‘22 May ‘22 Jun ‘22 Jul ‘22 Sep ‘22 25 25 25 25 25 25 25 25 25 -25 -25 -25 III. Supply chain disruption For at least another year, consumers will continue to experience the effects of the supply chain disruption. The supply chain has become more challenging as a result of the Russia–Ukraine war. It is anticipated that in a year, things will return to normal, provided the war ends. But recent factory closures in China because of a heatwave that has prompted a water and electricity supply crisis continue to lessen the quantity of items available for manufacture in other regions of the world. Low growth, high pricing, and bare shelves are expected to continue for at least another year. -50 -100 25 50 75 75 75 Chart: Gabriel Cortes / CNBC Source: Federal Reserve Board of Governors A survey conducted by EY to study the effects of the pandemic on company supply chains Negative effect 72% Positive effect 11% 8% 17% 55% 18% 3% The pandemic has had a significantly negative effect on our company The pandemic has had a mostly negative effect on our company The pandemic has not affected our compnay The pandemic has had a mostly positive effect on our company The pandemic has a significantly positive effect on our company Note: Some charts add up to more than 100% due to rounding 4

5. The Return of Global Inflation Comparing inflation in Europe with the U.S. Although the headline inflation rates — around 8% in both the U.S. and Europe — are becoming more comparable, the underlying causes, effects, and approaches to treat it are very different. The European Central Bank should adopt a relatively moderate stance because more of the inflation in Europe is imported, making it more painful but also more transitory than the inflation in the U.S. Inflation increased at a 12% annualized rate in Europe during the first four months of the year, compared to 9% in the U.S. The significant spike in the price of natural gas — which is now around $27 per million British thermal units after being nearly three times as expensive in the U.S. — is a major factor in the comparably enormous runup in inflation in Europe. Food and energy inflation increased worldwide due to Russia’s invasion of Ukraine, but these effects were far more pronounced in Europe than in the U.S. A significant disparity appears when the volatile food and energy components are removed from core inflation, which economists concentrate on since it is a better indicator of future inflation than the more erratic headline statistics. Comparatively speaking, core inflation in the U.S. is projected to have increased by roughly 6.5% over the past year, compared to only 3.8% in Europe. Additionally, when the pandemic began, some of the extra core inflation in Europe was also imported from the U.S. Therefore, during the pandemic, Europe also saw significant monetary and fiscal stimulus, as well as similar dynamics of supply and demand. While both the U.S. and Europe experience a mix of long- term domestic demand-driven inflation and short- term global supply-driven inflation, the ratios in the two economies are considerably different. Overstating the extent to which inflation is global and ignoring the numerous factors that are unique to the U.S. would be a mistake on the part of U.S. policymakers. In contrast, Europeans should exercise more restraint and refrain from overreacting to the disproportionately high rate of global inflation they are currently experiencing. M&A is expected to dampen for the remainder of 2022 Are there chances of recession? There are concerns that a recession could hit the economy. A four-decade high in inflation rates is reducing purchasing power and redistributing consumer spending to the most impacted regions. Many industries are already feeling the strain and are under pressure to maintain historical performance since there are fewer dollars available to spend on other commodities. Many businesses are waiting for inflation to reduce, interest rates to stabilize, and an economy free of the threat of recession before testing the M&A markets since sellers, unless forced by circumstance, do not prefer to sell while sales and profits are under strain. iii. Cooling of capital markets Over the past few months, the public markets for equity and debt capital have been virtually closed, and they might not open again for some time. The financings that are being completed typically have lower leverage multiples and higher interest rates, which will eventually cause valuations to decline. Due to the lack of activity in public markets, direct private lenders are now the main source of finance. Large transactions are under pressure since these lenders are less equipped than money center banks to finance larger leveraged buyouts. Although predicting the future is never easy, a lot of reasons point to a continued slowdown in M&A activity in the second half of 2022 and possibly beyond. It is crucial to consider past M&A activity in light of the present. The year 2021 saw the most M&A transactions ever recorded. Even a significant decline for the entire year of 2022 would lead to one of the most active M&A markets in recent memory. Closed U.S. M&A transactions were 17% higher than the pre-COVID period of 2019 but were down 13% from the same period in 2021. The completion of the 2021 pipeline is a major driving force behind the activity in 2022. i. and differing value expectations Since the beginning of the year, the Federal Reserve has raised interest rates by 300 basis points, and it is quite likely that there will be several more increases to help fight excessive inflation. Because present values are revised as a result of higher rates, assets are revalued, which has a negative effect on the economy. Despite sellers typically take longer to modify their value expectations to a new normal. Deal activity is hampered by this disparity in valuation assumptions. It will be challenging to agree on a suitable pricing strategy until valuation spreads normalize and volatility declines. ii. Higher interest rates lead to stock market volatility the current market circumstances, 5

6. The Return of Global Inflation iv. Regulatory constraints Along with all these other concerns, increased and unpredictable regulation is also reducing M&A activity. As an example, the US Securities and Exchange Commission (SEC) has released a number of new regulatory proposals regarding the scrutiny of transactions using special purpose acquisition companies (SPACs). The issuance of new SPACs has virtually ceased due to the uncertainties surrounding these proposals, and several bulge bracket banks have lately declared reducing their participation in SPAC IPOs and de-SPAC transactions. Optimism going forward Towards the end of 2022, we will likely see a further slowdown in M&A activity as a result of the weak economy and an uncertain regulatory environment. The long-term fundamentals supporting the M&A markets are favorable despite these circumstances, even in 2022. The pandemic taught us that acquiring new size and capability allowed the strong to become even stronger. Even with the current difficulties, businesses are well- capitalized and prepared to close agreements when the time comes. The markets will continue to reward wise strategic moves when opportunities present themselves, as they always do, but patience will be required. Overall, consumers have healthy balance sheets and should keep spending, albeit their way of allocating money may change due to inflation and rising energy prices. Sponsors will take advantage of reduced valuations when sellers cannot hold out for a better price environment or the reopening of public equity markets because they have enormous sums of capital to invest. M&A, like most other economic sectors, is cyclical, and an occasional slowdown is good for the system since it gives the environment a chance to adapt and become stronger. When the environment stabilizes and returns to more favorable conditions, a brief respite in the recent frenzy of activity should increase demand, allowing the market to resume higher levels of activity. 6

7. The Return of Global Inflation About the Authors KUNAL DOCTOR • Associate Vice President | Investment Banking & Valuation Kunal has over 11 years of professional experience in investment research functions. His role involves supporting equity (sell/buy side) and i-banking clients globally for mandates across debt and equity fund raising and management of key stakeholders— clients and team members. SALMAN AHMED • Senior Analyst | Investment Banking & Valuation Salman has more than two years of professional experience working in investment research functions. His role entails supporting investment banking and private equity clients globally covering buy-side and sell-side deal mandates & assisting them on various quantitative and qualitative research with good exposure to the Technology sector. Disclaimer This document makes descriptive reference to trademarks that may be owned by others. The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or get commercially benefited from it or imply the existence of an association between SGA and the lawful owners of such trademarks. Information regarding third-party products, services, and organizations was obtained from publicly available sources, and SGA cannot confirm the accuracy or reliability of such sources or information. Its inclusion does not imply an endorsement by or of any third party. Copyright © 2022 SG Analytics Pvt. Ltd. www.sganalytics.com GET IN TOUCH New York | Seattle | San Francisco | Austin | London | Zurich | Pune | Hyderabad | Bengaluru 7