The “Confidence Paradox”: Business confidence has soared but there is still a reluctance to move – are we at a tipping point?
An improvement in mood and opportunities not yet leading to action…
Global business confidence in economic and financial conditions has soared in the last 6 months according to Ernst & Young’s 8th Capital Confidence Barometer for April 2013 -based on a survey of around 1,500 businesses worldwide, 10% of which are in the UK.
However it is not clear that this confidence will translate into a significant acceleration in corporate investment: UK business is planning to move forward in a measured, conservative way. This paradox between soaring confidence and steady activity shows just how severely business self confidence has been knocked back by the length, depth and volatility of the slowdown.
There is some evidence that management’s confidence and ambition is growing but that the mood in the boardroom remains risk averse and lagging behind. Risk management may have become risk avoidance in the Boardroom.
Will the UK be missing out?
The other striking feature of the research is the major discrepancy between the international expansion strategies of UK corporates and the rest of the world. Globally, capital is moving again and chasing opportunities in the markets with strongest demand such as in North America and the emerging markets. UK business has a much more diverse set of targets with 2 of its top 5 destinations being in the slower growing Eurozone and with only one of the UK’s top 5 target economies being in the global top 5.
While the slowdown in the world economy has been evident for all to see, now that positive momentum is building the UK risks being left behind. The Ernst & Young ITEM Club Spring forecast predicted that the UK would continue to lose world export market share and it does appear that UK businesses may be either missing out on or simply not chasing the most attractive opportunities.
Business confidence has soared in the last 6 months
Confidence in global and domestic economic growth is very strong. 58 % of UK businesses are confident about that the economy is improving, up from 18% in October and 83% expect growth in GDP to be 1% or better this year, higher than consensus forecasts. 50% expect to increase jobs in the next year and 44% are positive about credit availability, more than double October’s level.
While sentiment about equity valuations and market volatility has also improved, at 33% and 25% positive respectively these two measures are much weaker and do highlight the continued uncertainty about financial markets amongst business leaders. Nevertheless 45% of respondents expect equity valuations to increase in the next 12 months, the highest reading for 2 years, and business is generally relaxed about the gap between buyer and seller expectations – viewed overall, corporate sentiment on the financial markets is positive.
But will it translate to action?
Then we come to the paradox: sentiment is much more positive and management is clear that growth is becoming a priority for their businesses. 62% of UK businesses are focused on growth, the highest share since April 2011 and 10% above the global average.
The first sign of the paradox is the difference between management and the boardroom. Our respondents tell us that “Efficiency and Cost Savings” and “Risk Management” still dominate the boardroom agenda, being mentioned by 72% and 66% of interviewees respectively. Contrast this with mentions of “Geographic Expansion” at 34% and “R&D Investment” at 43%: significantly weaker scores. The data suggests that Boards and management may be in different places in terms of confidence and their willingness to push forward with a growth agenda.
The discrepancy between sentiment and action is further illustrated when we explore how companies might use any surplus cash. Over the last year the balance has shifted towards growth. 27% would pay down debt, 6% increase dividends and 6% buy back stock so 41% overall would return excess cash to shareholders. This is down from a high of 54% 6 months ago with the balance shifting to using cash to grow. However, only 12% of the 61% who would deploy the cash for growth would look to M&A. The majority plan to rely on inorganic growth.
Maybe but the focus will be on “lower risk” growth
Without doubt, the” growth” being talking about is lower risk growth. As noted above, the focus is on organic rather than inorganic (M&A) activity: only 27% of UK companies plan to undertake a transaction this year, compared to 29% globally and this is likely to be relatively small beer, 91% envisage a deal below $1 Billion – a far cry from the megadeals of the boom years. Strategies are risk averse. Plans to increase leverage are not significant, only 24% of companies plan to increase their debt despite favourable funding markets and cash will make up 53% of any deal financing.
When we drill down into organic activity the low risk approach becomes even clearer. 34% of respondents say their focus will be on core products and markets and only 10% will look to expand into new geographies and markets. Most surprisingly, only 12% of UK respondents expect to divest a business in the next year. This seems a very low level as now would be the perfect time to ensure the business is optimised for future growth. This does suggest the UK is not responding as quickly and decisively as it should to the new economic environment.
Some sectors are moving faster
There are some signs of faster activity. Both globally and in the UK, 4 sectors: Automotive, Technology, Consumer Products and Life Sciences have an above average intention to undertake transactions. These are sectors for which the emerging market opportunity is significant and tends to confirm our view that some parts of the UK economy may be missing the opportunities the recovery in global trade presents. Without doubt, regular, detailed analysis of the opportunities by segment, geography and sector is critical to ensure strategy is optimised in this dynamic environment.
Are we at a tipping point?
On the surface it appears that increased confidence is not translating to activity. However it could be that we are capturing data at a point in time and UK business is currently processing he data and is on the verge of a change in focus. We may be at a tipping point with confidence reaching the level at which momentum starts to build and we witness a snowball effect in activity.