Business confidence is improving but pragmatism means it is steady as we go with a pivot to developed markets.

Corporates increasingly confident in the global economy…

EY’s 12th Capital Confidence Barometer, a survey of around 1,600 decision makers globally, shows that 83% of respondents are confident that the global economy is improving, a significant increase from the 53% who felt this way in October 2014. This positive outlook extends beyond the economy with business having a positive view of global corporate earnings, credit availability and equity market conditions..

This is something of a surprising finding. In January the IMF downgraded its forecasts for global growth, while the problems faced by previously rapid growing markets such as Brazil and Russia are well known and the slowdown in China has cast a shadow over many emerging markets. Why is business so confident in the global economy?

…rather than their local markets…

The confidence that businesses have in the global economy is in marked contrast to their views on their own domestic economies. As the chart below shows, corporates are significantly more confident in the prospects of the global economy compared to their local economy. Spain is the only major economy with business executives having more confidence in the local than global economy.

The economy is improving
Graph 1. The economy is improving

…and the global risks are not being ignored.

Yes business is more confident in the prospects for the global economy but corporate leaders are still very aware of the risks that exist. Political instability and currency and commodity volatility are both prominent in the list of most significant economic risks identified by respondents. His is no surprise: the global political outlook has dominated the news in recent months and the challenge posed by major shifts in currency values has become clear through the recent earnings reporting season.

What do you believe
Graph 2. What do you believe to be the greatest economic risk to your business over the next 6 to 12 months?

Should we twist or stick?

The mixed picture of business confidence and risk makes decision-making for corporates very challenging. Is now the time to seek to exploit stronger global economic conditions or should the focus be on the domestic business or on risk avoidance? The answers in our survey suggest that the preferred way forward is a pragmatic approach seeking to manage across the various conflicting issues.

On one hand, despite increasing confidence in the global economy, 54% of respondents state that their primary focus is on cost management compared to 31% focussing on growth. This is a reversal of the relative positions in October 2014 when the respective figures were 37% and 40%. Consistent with this cautious approach, the intentions to hire staff have fallen from 52% to 29% of respondents since October 2014 although 65% of businesses plan to maintain staffing levels

On the other hand, despite the focus on costs, 56% of businesses plan to make an acquisition in the next 12 months, up from 40% six months ago. And, reflecting the strong confidence that corporates have in the global economy, 84% of those deals are expected to be outside of the company’s primary domestic market.

However, most M&A activity, 81% of it, is expected to be deals of under £250 million and only 5% of companies plan deals of over £1 Billion in the next 12 months. We can conclude that both cost management and acquisition strategy are actually very much carefully managed incremental programmes rather than ambitious transformation strategies. Business is confident but cautiously so and this translates into balanced strategies.

Back to the developed markets

However the most striking demonstration of how corporates are seeking to balance their conflicting views on confidence and risk is provided by the change in their geographic focus. Investment intentions in the next year are very much international: only 16% of M&A is expected to be domestic, 54% is regional and 30% further afield. Corporates do appear to believe the grass is greener outside of their home market and are searching for growth beyond their domestic borders.

Acquisition capital
Graph 3. What percentage of your acquisition capital are you going to allocate to the emerging markets in the next 12 months?

But this is still cautious international expansion with a significant reduction in the amount of capital allocated to emerging markets. 65% of companies expect less than 10% of their investment to be in emerging markets and another 15% expect to allocate less than 25% of their capital spend to these geographies.

There is a clear pivot back to the developed markets with only China and India of the emergers making the top 10 destinations identified by respondents to our survey. In an uncertain world, the upturn in the Eurozone and relatively good performance in the USA and UK has changed perceptions. Cautious corporates are looking internationally for growth but increasingly, and for the first time in a long while, to the developed markets.

 

 


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