Southeast Asian corporates focus on stability and growth amid returning buoyant market sentiments

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  • Heightened optimism in global and local economies
  • Focus on organic growth over M&As
  • Intra-regional investments favored

Singapore, 9 May 2013 – Market sentiments are up in Southeast Asia (SEA) from a round of pessimism in the latter half of 2012, according to the latest EY’s bi-annual SEA issue of the Global Capital Confidence Barometer released today. The survey of more than 1,500 senior executives in 50 countries around the world, of which 131 were from SEA (Singapore, Malaysia, Indonesia, Thailand, Vietnam and Philippines), was conducted in February and March 2013.

Eighty-six percent of SEA respondents believed that the global economy was stable or improving compared to just 46% six months ago; an even stronger 90% felt likewise about their local economies compared to 78% six months ago. While regional economists have predicted SEA to grow above 5% over the next 12 months, 95% of SEA respondents believed that their local economies will grow 5% or less.

There is reason to be optimistic, with most SEA markets maintaining steady growth and providing good prospects for investments. Respondents cited the increased certainty around growth in China, steady monetary and economic policies in main SEA markets, opening up of frontier markets such as Myanmar, and improved capital markets around the world as reasons for this renewed confidence.

Harsha Basnayake, Transaction Advisory Services Leader for SEA and Singapore at EY says: “The sentiments of SEA respondents reflect the mood among corporate executives. The clouds of doom are fading and there is a sense of stability or acceptance of the new economic order. At the same time, SEA as a region is in the spotlight and no longer a hidden nugget among emerging markets. As such, a contradiction between positive economic sentiment and cautious corporate attitude domestically has surfaced. There is a lot of merit to challenge this sentiment. The opportunities and longer-term prospects of the region are real. That requires some bold and out-of-the-box entrepreneurial thinking to ride the wave.”

The optimism among SEA respondents extends to their views on corporate earnings and credit availability. A respective 50% and 47% of the respondents expected growth in the two areas in the next 6 to 12 months. A further 90% of SEA respondents also believed that access to credit is stable or likely to improve over the next 12 months.

Consistently over the past few surveys, that SEA corporates were observed to be carrying strong balance sheets. The current survey sends a clear message that corporate earnings are going to be stable for the next six to twelve months. Harsha adds: “As a result, there is cash available to fund both organic growth and acquisitions. But when market conditions allow steady profitability and good access to credit, it is also time for companies to think about rewarding their stakeholders, especially shareholders. There is an opportunity to challenge corporate balance sheets. Companies should start looking at working capital improvements and optimal capital structures, so that their capital structures are efficient and they create capacity to reward their stakeholders”.

Organic growth takes precedence over M&As

The stable economic growth in local markets has influenced corporates to focus on organic growth. Forty-four percent of the respondents indicated that they would use excess cash to fund organic growth over the next 12 months. Despite having strong balance sheets and access to credit, SEA respondents are adopting more cautious and defensive growth strategies by focusing on core products and existing markets. At the same time, SEA respondents are also recognizing the significance of governance issues, with risk management (63%), capital allocation (61%) and efficiency and cost controls (58%) ranked among their top concerns.

On the other hand, deal appetite has declined. Seventy-five percent of the respondents did not expect to pursue acquisitions over the next 12 months, even though there was an overall higher level of optimism in the number and quality of deal opportunities compared to six months ago. Close to half (46%) of the respondents perceived the valuations gap to increase, with 62% considering the gap to be between 10% and 50%.

Intra-regional investments favored

While M&A sentiments among SEA respondents appear to be subdued, the survey showed a heightened appetite from inbound investors. A majority of SEA respondents see the region as core markets for their expansion ambitions. Of their top 10 preferred investment destinations, six were SEA countries, namely Indonesia, Vietnam, Malaysia, Thailand, as well as frontier markets like Cambodia and Myanmar. While usual favorites like China, India and Hong Kong remain, the US and Europe no longer rank on the list, unlike six months ago. Globally too, many of the SEA markets, particularly Indonesia, are identified to be among top investment destinations with good prospects for growth.

Harsha concludes: “It is interesting that deal appetite among SEA respondents is steadily declining despite the increase in deal volumes in the region. There is also a reluctance to sell any of their businesses with 72% indicating that they don’t want to undertake any divestment at this stage. Inbound investors are also looking at the region favorably. This is an interesting dynamic. When there is scope for many of the sectors in the region to consolidate and grow, collaborative efforts between regional entrepreneurs and inbound investors can give rise to good opportunities for creating value. In a growth-hungry world, the regional businesses will obviously have the upper hand and this is reflected in the valuations that we are seeing in the region.”

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Note to editors

About the survey

The EY Corporate Confidence Barometer is a survey of over 1,500 senior executives from large companies around the world and across industry sectors. The objective of the Barometer is to gauge corporate confidence in the economic outlook, to understand board priorities in the next 12 months, and to identify the emerging capital practices that will distinguish those companies that will build competitive advantage as the global economy continues to evolve. This is the eighth bi-annual Barometer in the series, which began in November 2008.

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This news release has been issued by EY Solutions LLP, a member of the global EY organization.