Six months on from our second Barometer, this third survey of executives from some of the world's largest companies indicates that the global downturn is not easing. This has led to ongoing investor caution with austerity measures, increasing regulation and currency conflicts just some of the issues continuing to undermine confidence in the global economy.
While Australasian business is a little less confident about the global markets than it was in the previous six months, optimism in the local market can still be considered healthy.
And while Australasian business is a little less confident about the global markets than it was in the previous six months, optimism in the local market - while levelling off from an abnormally high position - can still be considered healthy.
Australasian respondents also tell us that the limitations that existed around accessing finance to fund major capital projects are starting to ease. While capital market conditions have improved since our last survey in April 2010, few global players are considering M&A in the next six months, with the gap appearing to grow between the appetite to buy and the desire to sell.
In Australia the picture is a slightly different one, with a recent uptick in deals at the top end of town. What we are seeing in the global economy is a two speed recovery, with more robust confidence in emerging markets contrasted with a return to more restrained strategies in many mature markets. We are also seeing this two speed recovery phenomenon in Australia; however in our local economy it revolves around the divergence between our largest and best capitalised companies compared with smaller companies who have less access to capital.
- The global downturn is not easing. 34% of global companies believe recovery will happen within the next 12 months, compared with 40% in April 2010. This compares with 29% of Australasian companies who believe the global recovery will happen in the next 12 months, an increase of 3% from April 2010 result. The biggest shift in Australasian sentiment however is at the less positive end of the scale; while 15% of respondents indicated in April that recovery in the global economy would take more than two years, this has jumped to 27% in the October 2010 survey.
- Optimism in Australasia levels off. In our April 2010 survey 92% of Australian respondents felt confident about the strength of market opportunities at home, but in the October survey this level of optimism appears to have levelled off (66%) to reveal a more realistic outlook for the local economy. Given that Australia did not technically enter recession alongside many of its OECD counterparts and with Australian business therefore watching the turmoil somewhat from the sidelines, the October 2010 results were coming off a high baseline. That baseline has now tempered to be more in line with global sentiment as emergence from the shadow of the downturn takes longer than initially expected. Sentiment around the New Zealand economy has also levelled off in the last six months, in line with their Australian counterparts.
- Credit conditions for deals increasingly favourable. Over half of global (58%) and Australasian (51%) respondents indicated that credit/capital conditions are better now than they were six months ago. Access to capital to fund deals has also improved for our global counterparts with 36% stating that access to funding is not a problem for their companies. Australasian respondents were of a similar opinion with 42% agreeing that there are no barriers to financing for their organisation, with the same percentage reported by respondents in April 2010.
- Deleveraging trend continues. 48% of global respondents said they need to refinance loan or debt obligations in the next four years - a decrease in the proportion that was in this position in April (58%). In Australasia the trend was similar with 48% needing to take action within the four year period - the same proportion as six months ago - and of that 48% some three quarters need to take action in the next 12 months.
- Downturn in the global economic confidence reverses upwards M&A trend. Despite improving capital confidence and a decrease in the number of global respondents that said they were restricted in pursuing inorganic opportunities, those that are actively looking for an acquisition fell from 38% to 29%. A similar picture has emerged with our Australasian survey respondents in that those actively seeing out acquisition opportunities as a growth strategy has fallen from 46% to 27%.
- Trend for organic growth continues. 52% of Australasian respondents are intending to pursue organic growth during the next six month period; in April 2010 this percentage was 42% and in 2009 the percentage sat at 28%.
- High growth markets attract acquisitions: Australian business in particular is continuing a trend of looking to the Asian market to drive their growth story. In our November 2009 survey, India was a popular choice for Australian respondents, at three times the level of China. The Philippines also rated of interest as an acquisition market in 2009. Now, increasingly, Australian companies are adding to that "hot" list and looking for opportunities in Vietnam, South Korea, Malaysia and Indonesia.
To discuss your company's capital agenda, please contact your usual Ernst & Young advisor or any of our Transaction contacts.
Capital Confidence Barometer: November 2010 as a printable document (6.91 MB PDF)
Video: Graeme Browning speaks to Sky Business News
Oceania Transactions Leader, Graeme Browning speaks to Sky Business News about the findings from Ernst & Young’s third Capital Confidence Barometer.