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Capital Confidence - EY - Australia

Australasian Capital Confidence Barometer, April 2012

Capital Confidence

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What is your current debt to capital ratio?

Do you plan to refinance loans or other debt obligations in the next 12 months?(Yes)

What is your perspective on the state of the global economy today?

What is your perspective on the state of the local economy today?

Intra-Asia-Pacific cross border activity as well as inter Asia-Pacific cross border activity is increasingly perceived as a barometer for the global community’s economic health.

In the 6th global survey, we found economic outlook, optimism, business health and willingness to divest or engage in M&A activity varied by market cross Asia-Pacific.

Which markets are likely to pursue acquisitions in the next 12 months?

Singapore Indonesia Malaysia Mainland China South Korea Australasia
58% are likely 35% are likely 50% are likely 22% are likely 4% are likely 32% are likely



Intra-Asia-Pacific cross border activity as well as inter Asia-Pacific cross border activity is increasingly perceived as a barometer for the global community’s economic health.

In the 6th global survey, we found economic outlook, optimism, business health and willingness to divest or engage in M&A activity varied by market cross Asia-Pacific.

Which markets are likely to make asset sales or divestments in the next 12 months?

Singapore Indonesia Malaysia Mainland China South Korea Australasia
33% are likely 43% ar likely 35% are likely 9% are likely 12% are likely 23% are likely





Most Australasian corporates see a brighter outlook. A quarter expect to hire or create jobs in the next 12 months and about a third are positive about corporate earnings.

Cash remains king for Australian companies. Balance sheets are strong, with debt to capital ratios remaining very low (73% of Australian companies have a debt to capital ratio of less than 25%).

The overwhelming majority (85%) either expect this to remain constant in the next 12 months or fall further, continuing a cautious trend in balance sheet leverage.

Given this, it is not surprising that cash remains the primary source of deal financing for most (62%) in the next 12months, back up to levels similar to November 2009.

Perhaps surprisingly, given most respondents still expect short term volatility in the stock market, equity funding has risen slightly as a primary source of deal financing in the next 12 months, up from 11% in October 2011, to 17% now. After spiking at 32% six months ago, debt as a primary source of deal financing is back down to 21% of Australian respondents.

New Zealand findings

The picture is slightly different in New Zealand. Debt to capital ratios are slightly higher — although still low — with half of New Zealand businesses at 25% or lower gearing, and a third with debt to capital ratios of between 25%-50%. However New Zealand companies are almost twice as likely to use debt or equity as a primary source of deal financing in the next 12 months compared to their Australian peers.

Globally, debt to capital ratios are also relatively low, with 51% of respondents at 25% or lower gearing.

Re-financing intentions for the next 12 months are on par with six months ago for respondents globally (34%) and for Australian companies (23%), but significantly higher for New Zealand companies (39%). Of these, 27% of Australasian businesses are re-financing to extend the maturity of debt, 20% to retire debt and 15% to reduce interest costs.

Businesses more positive about outlook

Steadily improving news in the United States and some easing in government default fears across the Eurozone have helped to lift confidence from respondents globally. Half of all global respondents believe the global economy is improving, twice as many as six months ago.

Confidence and optimism has lifted or remains stable across a range of indicators including economic growth, employment growth, corporate earnings, credit availability and market stability.

Australasian businesses are also twice as optimistic about the global economy as they were in October — with 30% who believe the global economy is improving, up from 16%. A further 52% say it is stable, with a sharp drop from 53% to 18% in those who believe it is declining.

Even with this uplift, the confidence of Australasian respondents remains significantly softer than their global peers about the global economic outlook, as was the case in our last barometer in October 2011.

In Australasia there has been a noticeable lift in confidence in the local economies, with 91% who believe they are stable or improving, well up on 70% in October, and a dramatic decline from 31% to 9% in those who believe the local economies are declining.

Cautiously optimistic

Local respondents appear hopeful, but wary of another false dawn. Concerns over a ‘hard landing’ in China — while now at least partially dissipated — may well have impacted the strength of local confidence in the economic outlook.

Regulatory concerns

The notable area where corporate sentiment is more negative is the regulatory environment. In Australasia, 27% feel the current regulatory environment is having a negative impact on growth, up from 20% in October.

In the past six months both the carbon tax legislation and Mineral Resources Rent Tax (MRRT) legislation have been enacted. Combined with the leadership tensions within the minority Federal Government, it seems corporates’ confidence in certainty around the regulatory landscape has been eroded.




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