Takeways: This week we’re bringing you a ‘back to school’ edition of the blog – although, judging from this summer’s level of activity, it doesn’t look like many of you spent that much time away from your desk. Nevertheless, we thought it would be a good time to put together our thoughts on what the rest of 2015 might bring – and give you a sneak preview here. There is obviously a slight risk in putting our thoughts down now, since last week’s US non-farm payroll numbers brought us no closer to knowing when the Fed’s will move and China’s next moves obviously remain the other unknown in global equations. But, if we wait for certainty, we’ll be waiting a while – which neatly sums up were we are. Volatility reigns – although, that isn’t the only story….
What could the rest of 2015 hold?
Muted recovery continues, but with increasing divergence. Global stresses expose weaknesses, leaving companies to rethink their bets.
- Sovereign fortunes diverge further on commodities, currencies, debt and reform appetites.
- US growth vs China/commodity slowdown creates new dynamics, accelerates breakdown of old classifications.
- Oil price volatility widens fiscal and political fault lines.
- Increased threat of trade and currency skirmishes.
- Deflation risks amplified by China’s reboot and rise in outbound investment.
- Iran positioning – obvious in energy, also in consumer.
- Contrast between domestic and global fortunes leaves Fed vote on knife edge…but BoE holds.
In focus: Countries aligned to China, commodity and the dollar, e.g. Brazil, Malaysia, Russia (& Finland), South Africa, Turkey; Restructurings, e.g. Ukraine & Greece; Eurozone weak spots – e.g. France, Belgium.
Volatility fuelled by conflicting narratives: recovery and M&A boom vs Fed and Chinese policy uncertainties. Demand, currency and price fluctuations complicate forecasting & planning.
- Equities reaction to data highly sensitive and unpredictable.
- Commodity prices volatile and weak; squeezed by slow demand and strong dollar.
- Moderate flight to safety and yield hunt sustains much of bond curve.
- Volatility periodically spooks high yield investors; funds under intermittent pressure.
- Capital outflows spike in vulnerable emerging markets.
In focus: Currencies with commodity & emerging markets exposure; Energy & mining companies – and their suppliers; High yield & leverage debt below B+;
Low growth and changing sector dynamics should increase focus on capital optimisation and restructuring. Capital markets remain accommodating, if more discerning. Timing is vital.
- Slower and ‘redistributed’ global growth increases M&A incentive.
- Low cost of capital remains an incentive to acquire – mild increases still leave costs historically low.
- Increasing incentive to divest and focus capital and attention on ‘better bets’.
- Developing focus on capital restructuring – especially in oil & gas and mining – as new realities dawn.
- Credit markets open, but with evidence of greater discretion as HY fund outflows spike.
In focus: M&A pipelines; Oil & gas and mining capital planning; High-yield refinancing; New high-yield issues.
Regulatory changes keep coming, changing restructuring and financial landscapes; but regimes aren’t always keeping pace with the rate of market change.
- New law in Italy encourages creditor ‘cram down’.
- DTEK scheme of arrangement could set precedent for more US HY to restructure elsewhere.
- Increase in Chinese defaults, potential to break view of moral hazard.
- M&A momentum increasingly sees companies bumping up against regulators.
In focus: NPL sales; ‘Overdue’ restructurings; China’ appetite for ‘failure’; Anti-trust laws.
Volatile costs and demand should increase corporate focus on customer, operational fitness & contract resilience.
- Commodity downturn reduces costs, but tightens capex squeeze in exposed sectors.
- UK Government Spending Review due in November redoubles focus on cuts.
- Companies take mitigation action against effect of National Living Wage.
- Shareholder activist agenda focused on operational, as well as transactional, issues.
In focus: Exposure to high cost North Sea oil; government contracts; low-wage sectors (e.g. retail, restaurants, social care, cleaning).