Southeast Asian (SEA) corporates are muted in their confidence in the state of the economy today amid the slow and uncertain pace of recovery.
The latest issue of the SEA edition of the EY Global Capital Confidence Barometer reveals that 55% of SEA corporates believe that the global and local economy is stable. Only 22% of SEA executives are confident that the economy is improving, a sharp drop from the 67% of respondents who shared such sentiments six months ago.
The survey also revealed that the top concerns for SEA corporates are political stability in both local and global markets; volatility in commodities and currencies; and the slowing growth in China.
Executives also believe that changing customer behavior is the major source of disruption to their core business. Other top disruptive forces are advances in technology and digitalization, and sector convergence or increase in competition from companies in other sectors.
“We are moving into a phase where low GDP growth will become the norm,” says Harsha Basnayake, EY Asean Managing Partner for Transaction Advisory Services. “Resilience is an important theme, as CEOs and senior executives look at creative ways to seek growth. The sentiments expressed by the respondents reflect that they are waking up to this reality.”
Deal intentions remain robust as SEA corporates seek growth
Interestingly, despite the muted sentiment about economic conditions, 39% of the respondents say they plan to actively pursue an acquisition over the next 12 months, retracting only marginally from 42% six months ago. Regional respondents also expect M&A markets to improve over the next 12 months.
Deal fundamentals remain favorable as the majority of SEA corporates believe that the number (83%) and quality (62%) of acquisition opportunities and likelihood of closing deals (75%) are stable or positive.
Deal pipeline in the region remains robust, with 85% of SEA respondents indicating that they are working on three or more deals. Particularly, executives in Singapore and Thailand are most bullish; with 51% and 41% having five or more deals in the pipeline respectively. There is also an expectation of an increase in deals.
Harsha says: “Their expectations around M&A reflect what we see across the region – a stable deal environment. This is to be expected because in a low-growth environment, businesses are going to continue to look for alternative strategies to grow. There is a lot more consolidation opportunity to build scale in this region.
"We are confident that this trend is going to hold, so long as the region remains strongly committed to good capital flows, liquidity and a healthy business environment. Southeast Asia markets, among other emerging economies, continue to be in a good place, and that is conducive for M&As.”
Alliances seen as enablers to realize growth potential
The Barometer also revealed that companies are seeking alternative avenues for inorganic growth. Forty-seven percent of respondents expect to enter into alliances to create better value from underutilized assets.
Corporate alliances are preferred by executives in the current fast-changing business landscape, given its more informal and less permanent nature, together with the ability to mitigate significant risks.
Harsha explains: “In the increasingly disrupted world today, the Southeast Asia region is not insulated from the impact of the digital sharing economy. As such, seeking competitive scale and advantage through alliances appears to be a smarter option – because it creates innovative possibilities to seek better returns from both tangible and intangible assets owned by businesses.”