Asia-Pacific executives optimistic on economic improvement and M&A

Economic fundamentals and shareholder activists are spurring M&A appetite in Asia-Pacific.

According to the EY Global Capital Confidence Barometer, Asia-Pacific executives are increasingly optimistic about the macro outlook and revenue growth prospects for their businesses — but more conservative than their global peers.

Eighty-seven percent of Asia-Pacific executives expect both the global and local economies to improve. This is a marked improvement in sentiment as only 62% of Asia-Pacific executives expected the global economy to improve a year ago, with the same percentage also having a positive outlook on the local economy. Overall sentiment among Asia-Pacific executives is, however, lower than their global peers, where 93% expect to see an improvement in the global economy.

Ninety-seven percent of Asia-Pacific executives expect the market’s corporate earnings to either grow or remain stable, a similar sentiment to six months ago. In terms of their own corporate revenue growth, 68% expect to see growth between 6%–15% over the coming year. Seventy-six percent of their global peers expect to see the same percentage growth in revenues over the same period. Asia-Pacific executives are relatively cautious compared to their global peers, perhaps influenced by the ongoing uncertainties resulting from the trade tensions between the US and China, as well as the maturing growth in the China economy significantly influencing the Asia-Pacific markets.

Although Asia-Pacific executives favor a more bullish view on the economic outlook, they are mindful of the risks, with 33% citing the risk of an economic slowdown as the primary threat to their growth plans. Other interconnected risks such as supply-chain disruption (23%) and geopolitical uncertainty (21%) are considered to be significant risks to the growth of businesses. Companies should evaluate how each of these interconnected issues may impact their growth agenda. Building agility and having the ability to pivot quickly as circumstances demand is key to mitigating such risks.

External factors fueling more regular assessments and reshaping of portfolios

To counter the potential impact of a global economic slowdown and ever-accelerating pace of disruption, 57% of Asia-Pacific executives indicate they are now reviewing their portfolios quarterly, a significant increase from 23% six months ago. With increased frequency of portfolio reviews, executives expect to identify capital recycling opportunities and make smarter capital allocation decisions. Interestingly, there is growing recognition of the importance of identifying non-core, or underperforming, businesses and assets, and taking action to divest them in a timely manner.

Seventy-nine percent of Asia-Pacific executives say that they are compelled by activist pressure to continually reshape their portfolios — another reason for greater frequency and discipline around portfolio performance.  

Economic fundamentals and shareholder activists spurring M&A appetite

More than half (51%) of Asia-Pacific executives surveyed say that they intend to pursue deals in the next 12 months, significantly above the 10-year average of 42%. This suggests that executives are acquiring to grow their businesses and focusing on longer-term economic fundamentals, while filtering the geopolitical noise.

Shareholder activism appears to be playing a part in this drive for acquisitions. Seventy-nine percent of Asia-Pacific executives say they are compelled by activist pressure to continually reshape their portfolios. More than half (51%) of these respondents say that activist shareholders are driving them to make acquisitions for better growth and expansion of businesses, signaling more pressure than their global counterparts are experiencing (37%) to acquire. 

Asia-Pacific executives continue to be bullish on where the M&A market is headed, with 84% expecting the Asia-Pacific M&A market to improve in the next 12 months — a jump from 53% two years ago.

The top three most popular sectors to pursue acquisitions for Asia-Pacific executives over the next 12 months are automotive and transportation (72%), technology (61%) and financial services (59%). These sectors are all highly disrupted by technological change, with companies in these sectors turning to M&A to keep pace with customer demands, offer innovative products or stay competitive via new business models.

Asia-Pacific executives are also looking abroad as well as at home for their deals, with 72% of respondents saying they will go cross-border for M&A activity over the next 12 months — higher than the global percentage of 67% indicated by their peers.

Executives find overseas assets increasingly attractive and five of the top investment destinations for Asia-Pacific companies are China, Australia, Japan, India and the United States.

Freeing up capital from operations helps build resilience

Almost half (46%) of Asia-Pacific executives intend to build resilience into their companies’ profitability and cash flow by reducing overhead and administrative costs. A sharper focus in managing costs was also a highlight of the EY Global Corporate Divestment Study results for Asia-Pacific in 2019, where 81% of respondents cited a need to streamline their operating model as the top trigger for divestments over the coming year. An example of this can be seen where companies have been deploying technology, automation and artificial intelligence (AI) to improve production processes and certain routine administrative tasks.

Reshaping capital strategy for future growth

With intensified portfolio reshaping a focus for executives, Asia-Pacific companies will likely be able to free up capital to recycle into deleveraging of their balance sheets in order to capitalize on consolidation opportunities for growth in their core businesses. Near-record intention to acquire reflects an underlying confidence in the longer-term economic fundamentals for the region — with businesses repositioning in response to ever-changing market conditions.

This proactivity will create a necessary discipline for smart capital decisions among businesses in the region, as well as continuing to maintain a healthy M&A market.