The tumultuous start to 2016 has raised fears about US growth prospects – to the point where we need to address recession talk. Given the increasingly loose monetary outlook, a US recession and/or global downturn seem an unlikely scenario without a significant, systemic trigger. More of the same slightly sluggish growth is the most likely scenario and with that comes the continuing challenge to corporate earnings – and beyond.
What a start to 2016! Bear markets, $28 oil and talk of further easing and even US recession! Markets are probably over-reacting, but – as we’ve said before – this is what happens when investors wander along the yield curve to unfamiliar places. They get spooked when it gets dark and make monsters out of shadows. Of course there’s plenty to worry about – it’s just a matter of proportion. There are still enough buffers in place and enough positives for us to stay out of the bunker for now – albeit with an eye on the canned food supply. No doubt there are pockets of stress in this environment and we’re not complacent.. But, to illustrate the more nuanced picture, we’re going to take a look at our 2016 outlook for credit, share insight from the audience of our latest UK retail webcast and preview our latest profit warning report.
..but while there’s liquidity, spare cash and romance let’s face the market and transact! The prevailing corporate attitude in 2015 was to fight disruptive forces, low growth and uncertainty by transforming the portfolio and building resilience. Our base case for 2016 is that companies will face similar challenges, turned up a notch. There’s an air of fin de siècle in high yield debt markets and rising levels of uncertainty in the geopolitical, economic and natural environment have left us questioning what is truly unthinkable. But, as they did in 2015, we expect companies to meet challenges head on rather than bunkering down. There will be tough times, but there should also be enough positive momentum to keep the recovery on this bumpier road.
Takeaways: An end to uncertainty, an effective vote of confidence and the repetitive use of the word ‘gradual’ by the FOMC inspired a brief rally in most equity and bond markets – even in some more vulnerable areas. So, is there really nothing to see here after their 0.25% increase in interest rates? Not quite. The impact may be more insidious than immediate. After nine years of falling and then rock-bottom interest rates in the world’s largest economy, the official direction of travel is now up – and that changes everything.
We’ll be issuing a list of top ten themes for 2016 at the start of January. M&A is sure to feature and this week’s blog has a sneak preview in honour of a significant milestone and the return of a ‘mega-deal’ mooted in the last boom. There’s no reason to think that the deal carriage will turn into a pumpkin and the horses driving it into mice when the clock chimes midnight on 31 December. Companies will be doing deals in 2016 for the same reasons as they did in 2015 – to fight slower growth, embrace new trends and adjust their portfolio to new areas of growth. But, it’s a good time to think about what changes we can expect in the next year, in particular what recent activity means for the type of deals coming to market and how companies might need to adapt to the changing capital environment.
Takeaways: Euro-dollar divergence and the weak commodities outlook are on the agenda this week as we await new pronouncements from the ECB and OPEC – keeping the Fed’s next move always in mind. Given this week’s fever pitch of speculation, the ECB might need to take pretty radical action to move markets further and keep the deflation wolf from the door. In the absence of radical action from OPEC, it looks we’re ‘as we were’ in oil markets as we move into 2016. What does this mean on the ground for oilfield services, if ‘low and volatile’ is the ‘new normal’? Spoiler: waiting out low prices isn’t an option. Continue reading
Takeaways: Our world is changing rapidly and unpredictably. We’ve picked a few areas to highlight this week, starting with a startling BREXIT poll that could reflect a broader inward turn across Europe. The UK’s version of Black Friday will be a reflection of retail’s changing landscape – turned up to 11. Moves in high-yield markets are more subtle, but have fundamental undercurrents. The UK’s Autumn Statement will reshape the state.
The record level of deals we’ve seen in 2015 has been inspired by a delicate balance between rapid change and rising confidence. There has been enough challenge in the market to inspire M&A, but not so much that it topples investor confidence. Rising geopolitical uncertainties and growth risks could upset this delicate balance. Deals should only come to a halt in extremis – there is too much rationale to transact; but companies may need to work harder for financial and shareholder backing as we move into 2016 – especially for leveraged deals. Continue reading