Takeways: The rapid pace of change in today’s markets means companies need to be constantly reassessing their portfolios in order to stay on the right side of the ‘economic success line’. Luckily, this looks like a great time to sell with buyers coming back into the market in Europe. Many emerging nations, however, are finding the going tougher and tougher…
Starting gun fired on UK General Election as GDP growth is revised upwards
This week saw the starting gun fired on the UK General Election (polling day May 7th), with the result looking far from certain. Many commentators are suggesting this could be the closest – and potential most turbulent – election in recent years, with the shape of a new government open to a number of credible permutations. With current polling suggesting a coalition remains the most probable outcome, the debate rages on as to which parties are likely to get in bed with each other, albeit with some relationships already ruled out. The dissolution of parliament came with news that UK GDP growth for 2014 had been revised upwards, from 2.6% to 2.8%, amidst stronger exports and an increase in household spending. As the latest EY ITEM Club commentary highlights, the ingredients are now in place for the UK to expand by close to 3% in 2015. With the ONS also confirming that real household disposable income per head was 2.2% higher than the pre-credit crisis peak, the stage is set for battle between the leading political parties as each attempts to separate fact from fiction, and pledges from posturing. Pull up a comfy chair – this could be a fascinating few weeks.
Disruptive influences and M&A – the quest to remain competitive… and resilient
Of course there is a chance that Europe-wide elections and other uncertainties could dampen deal activity – especially in the first half of 2015. However, the region’s fundamentals are looking so good that we still expect this to be a bumper – if occasionally bumpy – year for transactions. The global IPO market looked a little subdued in Q1. After all, 2014 was an exceptional year, with an amazing convergence of factors. However, Europe’s new found attractiveness meant it still shone in Q1, with five of the top ten IPOs globally.
Total European M&A by value rose by 14% in Q1’15 vs. Q1’14, though this came from a lower volume of transactions and trailed the spectacular 21% increase seen at a global level. Filling the pipeline isn’t like flipping on a switch and this growth looks pretty impressive in a recent historical context. However, the fall in volumes in combination with rising values suggests a focus on more large, transformative deals.
All-in-all the ingredients are there for increased activity, including attractive foreign exchange rates, quantitative easing giving rise to record-low debt funding costs, sustained low commodity prices and a pick-up in underlying consumer demand. The second half of 2015 – if we move beyond current uncertainties – could be a busy time.
Which begs the question; is now a potentially lucrative time for owners of European assets to consider selling; taking advantage of the significant pools of liquidity in the market competing for a limited supply of deals? With wide variances in economic performance expected across all geographies and sectors in the near-term, the need for companies to review their strategy, business models and portfolios has never been more apparent. Jon Hughes, UK&I TAS Managing Partner, and Mark Gregory, EY Chief Economist, take a closer look at the key disruptive influences shaping transaction activity here.
No sign of a let-up in flow of US companies looking to Europe for funding and transaction opportunities
The sight of US companies raising financing en masse in the European market is certainly not the norm, but has been a notable feature of 2015 capital markets activity to date. With benchmark yields at record lows, one could be forgiven for assuming this was simply a function of companies taking advantage of nominally cheap debt, though such an observation misses the critical driving force – comparative credit spreads. Admittedly, for those US corporates with European assets, raising Euro-denominated debt would make sense from a traditional asset-liability matching perspective. For those who do not have such obvious funding requirements, the Euro-denominated debt opportunity is more nuanced, but no less attractive. The principal factor being not the absolute yield achievable on debt issuance in Euro’s, but rather the equivalent credit spreads achievable through such issuance, even once swapped back into US Dollars (thereby removing exchange rate risks).
If 2015 activity to date is a guide, it has become increasingly apparent that European investors are, on average, happy to accept lower credit spread premia for comparable credits than their US counterparts. Taking into account relevant transaction costs – including cross-currency swaps to convert Euro-denominated debt back into US Dollars – many US corporates have successfully financed themselves at a marginal cost cheaper than that which would have been achievable in their domestic capital markets.
The net result? Plenty of US companies making their presence felt with European investors, and an ever-increasing stock-pile of Euro-denominated corporate liquidity; ripe for funding transactions across Europe. If 2014 was dominated by talk of transactions driven by tax inversions, maybe 2015 will be the year when simple economic differentials between pools of capital provide the catalyst to increasing cross-border M&A, particular of a US origin. One to keep an eye on…
Emerging Markets – Back in the spotlight, but not for the right reasons…
Away from Greece’s very public stand-off with Germany and its other European neighbours, news of capital flows into Europe and strong momentum in US markets has dominated headlines of late. But last month’s protests in Brazil by more than 1 million of its citizens were a timely reminder of the increasing frictions that exist in emerging markets at present. With the spectre of spiralling inflation, economic recession and questions surrounding the basic provision of services (e.g water rationing), claims of corruption and government dysfunction are a worrying reminder of just how fragile the global economic recovery is.
Indeed, with Russian citizens continuing to withdraw capital and switch savings into US Dollars, and China witnessing a slow-down in growth and property prices retrenching, the historic flows of capital into emerging markets now appear to be on the reverse – the second half of 2014 saw the largest net capital outflows from emerging economies since the credit crisis. Whilst some developed economies are benefiting from this repatriation of capital, as investors seek a safer home for their cash, some analysts are now suggesting this could mark the start of a troubled time for emerging economies – in particular those with significant sovereign debt liabilities.
Economies that are heavily reliant on commodity exports are expected to bear the brunt of the pain, though the impact of a flight in capital could be far-reaching. For the developed nations, the impact could certainly be felt close to home, as trading partners to emerging markets economies feel the ripple effects of instability overseas. In the UK, growth prospects and business confidence levels remain very much at the optimistic end of the spectrum. That being said, one cannot forget that, in a global economy, meteorological rules apply; a butterfly flaps its wings in Brazil and poor weather conditions may very well ensue on the other side of the world.