Political uncertainty fails to dampen deal enthusiasm in Mexico.
The political uncertainty raised by the upcoming US elections has reverberated across Mexico’s economic landscape. However, even despite this volatility, expectations around dealmaking have rebounded from six months ago, according to the latest edition of our Capital Confidence Barometer. Mexico continues to be challenged by a range of macro factors.
The lead-up to the US general election in November 2016 has placed at center stage not only a threatened wall across the US-Mexico border but also the ongoing viability of the North American Free Trade Agreement (NAFTA). This, coupled with a strong US dollar juxtaposed against a weaker Mexican peso, has led a majority of Mexican executives to see the global economy as stable to declining.
Locally, however, they are more optimistic — the number of Mexican executives who see the domestic economy as improving has jumped to 31% from only 12% six months ago. Domestic market fundamentals are also up across the board, suggesting a rebound in confidence.
Although dealmaking intentions have not reached the highs of 2015, Mexican executives are feeling more optimistic than they were six months ago. The percentage planning to pursue deals in the next 12 months is above the CCB average, and deal fundamentals appear to support this renewed confidence. Executives feel more positive about the number and quality of acquisition opportunities, as well as the likelihood of closing deals, than they did in April 2016.
Another indicator of confidence is the number of deals in the pipeline. Almost 60% of the executives we surveyed suggested they are examining five or more deals, and more than half expect that number to increase in the coming year. Although the deals are smaller (more than half are focused on deals between US$251m and US$1b), they will help Mexican companies grow market share and be nimbler in responding to changes in customer behavior.
We see these disruptive challenges spurring Mexican executives to pursue both organic and inorganic routes to growth. In the next 12 months, nearly a quarter of Mexican executives see changing customer behavior and expectations as most disruptive to their core business, with advances in technology and digitization following closely behind. (By contrast, global executives say they are more focused on sector convergence and increasing competition as threats.) In response, 30% of Mexican respondents say they are looking at joint ventures and alliances to address these disruptive trends and take advantage of a changing landscape.
A final outcome in the US election should help calm the uncertainty that has dampened macroeconomic optimism in Mexico over the last several months. This, coupled with a quelling in currency volatility, should give Mexican companies more buying power both domestically and in their target markets worldwide.
Staying upbeat about the domestic market
Sixty-five percent of Mexican respondents see the global economy as stable to improving. However, the percentage of those who perceive a global economy in decline has crept up to 35% from 27% six months ago.
In terms of the local economy, Mexican executives express more optimism, with 31% suggesting that domestic markets are improving, up from 12% six months ago. Deal fundamentals support this sentiment, with confidence in corporate earnings, short-term market stability, equity valuations and credit availability all up since April 2016.
As Mexican companies consider their core business and M&A strategies over the next 6 to 12 months, political stability within the region, particularly relating to the 2016 US election cycle, and high volatility in currencies, commodities and other capital markets are seen as key risks to growth and performance.
Rethinking core business and talent strategies
With changing customer behaviors and advances in technology and digitalization seen as the top disruptors to core business strategies in the next 12 months, Mexican executives are looking to find the right balance between organic and inorganic growth to boost earnings. While 56% are focusing their efforts on organic initiatives, 61% are zeroing in on M&A, joint ventures and alliances — all of which have risen to the top of the boardroom agenda.
This level of disruption has Mexican companies rethinking their talent strategy, with 68% of executives indicating that they are looking to hire new talent. Meanwhile, 67% say they need to shift skills and talent within their businesses to gain efficiencies from greater automation and 39% say investments in automated processes have increased productivity.
Packing pipelines with five or more deals
Confidence in dealmaking is on the rebound in Mexico, with 37% of executives expecting the global M&A market to improve in the next 12 months — that number is up 25 percentage points from Mexican respondents’ reported intentions just six months ago. Local sentiment is similarly upbeat, with 31% of executives anticipating improvement in the M&A market, up from 13% six months ago.
In the next 12 months, 41% of Mexican companies say they are pursuing M&A, up five percentage points from April. Although this is still down from record highs, positive sentiment around deal activity remains above the global average.