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While a slower-than-expected recovery has seen global capital confidence falter, a liquid market and plenty of deleveraging activity promise big opportunities in 2013. Joseph Rodriquez reports.

Confidence falters, transactions stall

Volatility remains. That seems to be the clear message from our latest Global Capital Confidence Barometer survey, which shows that confidence of an improving global economy has dropped in the last six months.

A persistent slowdown throughout Europe, the sluggish US economy and slowing growth in emerging economies mean that just 20% of power and utility (P&U) executives believe the global economy is improving. This is down 65% from the 58% cited in April 2012. In an alarming result, 25% of the same executives felt the economy was declining, double that of six months ago.

Adding to this is a persistent feeling that the global economic downturn is far from over. In fact, 57% of P&U respondents expect the slowdown to continue for another one to two years, while 10% predict it will last more than two years.

While credit is still broadly available, particularly to large-cap P&Us, executives cite a decline in its availability at the global level, especially for small and medium enterprise (SME) borrowers.

Upside of the downturn

P&U company boards are focusing on efficiency and cost control, with 65% of survey respondents citing this as a priority right now. Growth is not as important, with 26% of P&U executives saying this was less of a focus today.

Smart P&Us are seeing the bright side in the downturn. Now is the time to carefully consider asset portfolios, trimming where necessary, while making any prudent cost reductions.

Many are surveying new markets, including Latin America, and different subsectors, such as renewables, driven by environmental mandates across much of the world.

Deleveraging remains a core priority amid the heavy debt burdens several big P&U companies are carrying. Vattenfall, Enel, E.ON, RWE and Veolia are among the big European players running asset disposal programs and cost-reduction initiatives to restore capital balance.

Better days ahead

P&U executives may be less confident about the state of the global economy than they were six months ago, but more than half (55%) believe the current global economic environment is stable. Stability in itself has a positive impact on the market, encouraging companies to make decisions now and plan for the future.

As we gain economic and political clarity in many developed markets, look for this stability to give way to optimism and opportunities to follow as a result.

With reasonable credit availability and stockpiled cash, an increase in M&A activity is predicted. Watch out for the arrival of some non-traditional players in the P&U sector as we move into 2013 — Japanese trading houses, conglomerates and others.

Also expect financial buyers, particularly pension funds, to be hunting regulated assets across much of Europe, as they seek out steady low-risk cash flows from utilities that need to sure up balance sheets and invest in their portfolios.

Brazil bucks the trend

A clear bright spot in our survey was Brazil, where power and utility executives believe their local economy is on the up. Though lower than 2011 levels, positive sentiment about the domestic economy rose nearly 70%: from 37% positive in April 2012 to 62% positive in October 2012.

Underpinning this was the fact that 49% of executives believe credit availability is improving at a global level, compared to 12% six months ago. Additional capital has found its way into the market as local development bank BNDES (Banco Nacional de Desenvolvimento Economico e Social) continues to actively support the energy market, banks work to create a secondary market for infrastructure bonds and private banks begin to finance infrastructure projects.

Despite the positive news, challenges remain for Brazil. Underinvestment in infrastructure, a complex regulatory environment, high taxes and the fear of government nationalization have meant the road to economic prosperity has been a long one. Companies keen to make the most of new opportunities should take the time to get to know this complex market. Local knowledge is a must, as is specialist advice on issues such as tax, human resources and the regulatory environment.

For more information

Global Capital Confidence Barometer survey You can read our Global Capital Confidence Barometer survey here.

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