Volatility remains a key concern for global executives, a new report finds. Perceptions about the global economy remains stable, however. Executives remain cautious, seeking to head off disruption to their businesses from, among others, changing consumer behaviour, digitalisation and increased cross-border competition. Relentless focus on costs and margins is top of the agenda for many, as are adapting to volatility and acquisitions. Climate change and corporate citizenship are of least concern to executives in 2016.
The EY survey, titled ‘Global Capital Confidence Barometer’, explores the current confidence of executives across a range of metrics, as well as their appetite for M&A. The survey involves 1,700 executives in 45 countries; nearly 50% are CEOs, CFOs and other C-level executives. Respondents represent 18 sectors, with company sizes ranging across segments: $500 million (16%); $500 million-$999.9 million (25%); $1 billion-$2.9 billion (21%); $3 billion-$4.9 billion (12%); and greater than $5 billion (26%).
The global economic environment is slowing, as the global growth engine – China – transforms from investment and export focused growth, to an internal consumption and services focused growth model. One of world’s largest economic regions, Europe, continues to mire in relative stagnation, while the US is managing only modest growth.
With few economics performing sufficiently bright to support global economic expansion, and with no current major crisis, executives report a picture of stability regarding the state of the global economy today. 48% expect real GDP growth to be in line with that of 2015, while 36% expect modest improvement. The expectation for modest decline has increased from 3% last year to 14% this year.
Four key indicators
The global economic picture has, since the excessive volatility around China at the start of the year and continued uncertainty about the direction of the global economy, become less optimistic across a range of indicators.
When asked about corporate earnings, for instance, last year 72% said they expected an improvement, while this year only 41% expect advancement and 53% expect stability. Short-term market stability too has seen improvement expectations fall off, dropping from 69% a year ago to 47% in the most recent survey. Credit availability too has been on the decline, according to respondents, falling from 72% expecting improvement last year to 48% expecting improvement this year. Only equity valuations has remained stable.
In terms of risks being faced by respondents, seen to affect businesses over the coming 6-12 months, volatility rates highest, in both economic and political situations. The top rated risk is ‘increased global and regional political instability’, cited by 29% of respondents, followed by ‘increased volatility in commodities and currencies’, cited by 26%. The ‘economic and political situation in the European Union’ comes in at 14%, with the ‘slowing growth in key emerging markets’ next on the list at 11%.
Internally to businesses, outside of the macroeconomic conditions they face, a number of challenges are affecting their competitiveness. The top rated challenge is ‘changing customer behaviour and expectations, cited as a potential disruption in the coming 12 months by 24% of respondents, followed by ‘advances in technology and digitalisation, cited by 21%. Further issues cited by the respondents are ‘sector convergence and increased competitiveness from companies in other sectors’, as cited by 17%, and ‘increased globalisation, cited by 13%.
According to the authors, “While these developments pose a major challenge, they also provide opportunities as companies seek to carve out new markets to boost their own revenues and earnings. Those companies taking a proactive attitude to perpetual change and challenges to their core business will be best positioned to take advantage of new market opportunities.”
The survey also asks executives about their current top level boardroom agenda items over the past six months. Of critical concern for 44% of respondents is ‘cost reduction/improving margins’, cited once by 44% of respondents, followed by ‘increased volatility in commodities and currencies’, as cited by 35%. The ‘impact of digital technology on your business model’ continues to loom large on the agenda of boardroom executives, cited by 33%. Acquisitions too remain relatively favourable on the boardroom agenda, as cited by 28% of respondents. The items of least concern, relatively, are ‘climate change’ and ‘corporate citizenship/wider stakeholder engagement’, cited by 21% and 22% respectively.
Pip McCrostie, EY’s Global Vice Chair at its Transaction Advisory Services, says that “While executives view the global economy as relatively stable, they need to create their own tailwinds in a prolonged low growth environment. A key challenge for executives is to maintain a strong grip on costs, while identifying new sources of revenue. Acquisitions, as well as alliances, are part of the corporate growth agenda for the foreseeable future.”