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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New era in capital after (US) QE and AQR draws a line.

Takeaways: A new era awaits. The Fed’s final QE hurrah was flagged, but we expect more market discretion, volatility, disruption and currency oscillation without this safety net. The cost of debt capital will rise. Weaker/exposed nations and companies can expect a rougher ride. Brazil and Turkey look exposed. AQR ran just about to script, but banks with passes won’t automatically start lending more –borrowers will still need to explore the alternatives.  Meanwhile, companies are finding this a tough economy to compete in and read, as the latest rise in profit warnings shows. They need to catch-on soon, shareholders are losing patience.

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Navigating risk and seizing opportunities

Understanding and navigating risks and identifying and exploiting opportunities are the core capabilities of any competent investor or company executive. Yet, we currently see both groups struggling, being hypnotised by over-blown potential risks and paralysed in the face of potential growth opportunities. Continue reading

Relearning about risk

As several recent surveys, including our own Capital Confidence Barometer, have shown, there is a heightened perception of risk for both the investing community and those executives charged with running our largest companies. This risk is comprised of many different strands: geopolitical, financial, regulatory, and even medical. It is important that we can recognise and appreciate these risks; but equally important that we react appropriately in the face of each and not overreact.

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Dealmaking set to rebound as middle-market looks set to drive M&A

According to EY’s 11th bi-annual Global Capital Confidence Barometer (CCB), 40% of companies anticipate pursuing acquisitions in the next 12 months – the highest number for three years. More robust market conditions and expanding deal pipelines should see global M&A return to 2006 pre-crisis volume and value levels after a five-year deal slump. While 2014 has been notable for high-profile mega-deals, the Barometer suggests that mid-market M&A will provide significant lift to deal activity. Almost two thirds (60 %) of respondents expect deal volume to increase further in the next 12 months – even after a relatively positive 2014 for M&A.

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