All I want for Christmas…

All I want for Christmas…

I’m not sure Santa will be able to deliver everything on central bankers’ lists this year. Mario must be wondering if he’s made the ‘naughty’ list as Eurozone inflation expectations dip again. Haruhiko got an early present in the form of an Abe election win – a green light for stimulus – and more inflation will be on his list. Meanwhile, Janet might be asking for a crystal ball – and a loudhailer. The Fed has a tricky year ahead, where timing will be everything and, troublingly, it doesn’t look like the bond markets are on the same page. It could be a rollercoaster ride if expectations don’t converge – or for different reasons, if Russia troubles continue to deepen. Moscow’s woes highlight again how the previously coupled emerging markets have diverse wants and needs. No-one is hoarding food and dollars on the streets of Shanghai. Indeed, our research shows that China’s executives have more in common with their US counterparts than the rest of the ‘BRICS’. All this adds up to ‘risk-off’ as we move into 2015. Next year might bring more growth, but increasing volatility will keep self-help measures – including a prudent approach to M&A – high up corporate agendas. Continue reading

Crude dollar shakedown

Takeways:  The impact of dollar and oil trends on divergent emerging markets caught our eye this week. A timely reminder to check and update plans for different geographies and sectors and realign strategies. As with so much these days, past performance is no guarantee of future growth. Although some things don’t change: Greece is the word once again in Europe. Meanwhile, borrowers have never had so many debt options available to fund their strategic plans. In low growth environments these plans increasing include cross-border M&A to combat against downturn and deflation. The year ahead is shaping up to be a complex and interesting time with new risks – but also great opportunities.

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Building resilience: life at $70 a barrel and below

Takeaways: We still live in interesting times. The year ahead will bring further gyrations in monetary policy, currency and commodity prices along with political change and undoubtedly something from leftfield. Stakeholders are increasingly applying the “how does this look with….?” test, be that $60 oil, a stronger pound, Eurozone deflation or higher interest rates. Companies need to demonstrate resilience in these markets. Volatility encourages selectivity. Oilfield service and equipment companies were feeling the pressure at $100 a barrel – $70 (and below) requires a new more resilient approach. Meanwhile, there is still every incentive for strong companies to secure profitable growth via acquisition and shifting sector dynamics are creating ‘motivated’ buyers and sellers. For those looking for a different type of financing, direct lending funds are certainly coming of age.

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The dance goes on: markets rise, whilst fortunes continue to diverge.

Takeways: US and European markets are dancing around record highs. Only one appears to be driven by economic fundamentals, but it would be misleading to suggest the US rally comes without disquiet or that Eurozone markets are all about Mario. European companies’ focus on operational improvement will provide opportunities for discerning investors.  Stronger US growth could advance the first rate rise to spring 2015 – amplifying the opportunities and risks of divergence we highlighted last week. Of course, there’s a debate to be had about the balance of growth and risk in 2015, which we’ll kick off here. GDP forecasts might actually stick for the first time since 2010….but we can still hear those liquidity canaries sing.  Sector dynamics continues to provide strong imperatives to do deals: from oil at $80 $75 $70 a barrel to the necessity to improve customer retention and meet capex demands as TMT convergence comes of age.

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Divergent – the opportunities and risks of diverging fortunes

Takeaway Monetary policies are polarising as fortunes diverge. Balancing the opportunities and risks will be easier for companies able to buy in areas of growth, access cheap debt markets in areas of stress and ride the currency waves. However, for those stuck on the wrong side of the currency equation or the growth and deflation divide, there’s a rougher ride ahead – especially if central banks create currency maelstrom in a race to devalue. Warning lights are indeed flashing. The need to combat slow growth and overcapacity should drive deals. Low prices are giving an extra push in oil. The AQR results and a fitful recovery should increase distressed debt sales in Italy – although its structures makes it more challenging than other active markets.

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Windows of opportunity

Takeaways: The IPO window isn’t closed entirely, but the bonanza is over. Investors are looking for a certain je ne sais quoi and keener pricing – open windows may also be limited in 2015. This opens up dual process or pure M&A opportunities – but HY borrowers should watch-out – it probably won’t get better than this. Although the first UK rate rise seems unlikely to come before autumn 2015, if the Bank of England is right and CPI lurks around 1% for most of the year.

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Deflating times

Takeaways: Deflation risks in spotlight. Eurozone forecasts dip further. Saudi action pushes oil price even lower. Bank of Japan hits the QE (panic) button (again) – raising the stakes in the currency markets.  Strong corporate balance sheets provide opportunities to counter growth/deflation risks with acquisitions – despite the October M&A pause, pipelines look strong.  Investor concern will focus again on highly leveraged companies in a deflation scenario – and on weak spots in the Eurozone, especially where capital protection is also weak.

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