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COMMUNITY UPDATE

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Trade wars, Brexit and heightened tensions between the US and Iran are the smouldering backdrop to today’s trading environment. And while the IMF has labelled global growth as simply “subdued”, it’s clear that a sudden shock could ignite the situation with unpredictable effects. Business leaders must remain calm but be ready to respond. 
 
Jamie Wilson, Managing Director of Group Services at Criticaleye, comments: “Confidence in the economy has taken a significant knock over recent months, and while 46 percent of leaders taking part in our Asia Retreat Research 2018 were ‘extremely’ or ‘reasonably’ confident that the rate of global growth would increase over the next twelve months, this has fallen to 27 percent in 2019.” 
 
She continues: “The economic outlook has joined a shortage of talent and increased competition in their list of the top-three barriers to growth. Certainly, wherever you are operating globally, the current political and economic environment is making it very difficult for businesses to decide where to prioritise investment for the future.” 
 
Here, members of the Criticaleye Community offer their predictions for the next 6 months and beyond: 

 
Guy Foster, Group Head of Research at Brewin Dolphin, pushes back the forecast of a recession to the end of 2020, with caveats around global tensions. 
 
We’re expecting global economic activity to recover in the second half of the year. Looking at the US, which tends to drive growth, bond yields came down by 100 basis points around the end of last year; lower bond yields mean lower long-term interest rates on things like mortgages which would normally feed through into more economic activity over the next nine to twelve months. There is some evidence of this starting to happen. We think we’re starting to see US housing construction recover now too and that’s quite a big driver.
 
We’ve also got a lot of stimulus coming from China. We’ve been disappointed by how slow it’s been to take effect, but in July we started to see some evidence of that. Also, this time last year, energy prices had been rising, but they fell sharply at the end of 2018 and since then they’ve just bobbed around. That’s taken the pressure off many businesses and consumers around the world. 
 
Consequently, we’re pushing back our forecast for the start of a recession towards the end of 2020. However, it could all happen quite quickly if the tensions between the US and Iran accelerate. That has the power to create a rise in oil prices which would trigger increased energy costs and a recession.
 
A growing risk is the intensifying trade war. Whilst the impact on consumers is limited, manufacturing businesses are beginning to feel the impact and trade is falling globally. The latest moves from the US and China have been significant escalations.
 
Finally, there is the struggle to extract the UK economy from the EU, where I believe the impact on UK growth is completely unforecastable. There isn’t any really useful research that’s been done on the impact of a no-deal Brexit, which leaves UK businesses none the wiser as to how disruptive it might be. Nobody is prepared to offer an unbiased assessment, and I don’t think it is something the private sector is in a strong position to analyse due to the complexity.

 
Mark Brockway, Head of London Mid-Market – Corporate Finance, EY, reveals that M&A activity remains positive but sector specific.
 
Within a changing economic climate, we continue to see pretty strong M&A activity in the UK. Brexit and more recently global trade issues, including those involving China, have been influencing buyers. However, there remains such a wall of liquidity across private equity, banking markets and corporates that M&A is continuing to transact in many, but by no means all sectors.
 
In the UK, there are a lot of cross-border deals, and we see much international interest. Brexit isn’t having the level of impact on M&A that had been predicted, but in some sectors affected by the potential for tariffs it’s at least influencing the timing of M&A decisions. We see buyers pricing in risks as well as opportunities from future changes in international trade.
 
M&A deals really have to stack up, and sellers need to prepare carefully for ever more thorough due diligence from buyers. One renewed area of focus is how well a business could withstand a future downturn. A number of transactions were aborted during the past 18 months because high price expectations weren’t met, but equally those deals which were closed have tended to be of premium assets at premium valuations.  
 
In terms of sectors, high-street retail and casual dining have obviously seen challenges and less M&A activity. Areas ticking a lot of boxes for both private equity and corporate acquirers are software and tech-enabled business services. Key features include, recurring revenues, defensibly high margins and relatively strong growth, often with a subscription model and demonstrably low customer churn. 
 
 
Ian Wright, Director General, Food and Drink Federation, acknowledges a food and drink industry that is innovative and dynamic but at risk of being sidetracked by Brexit. 
 
A no-deal Brexit would have a profound, perhaps mortal, effect on many of our members. For example, if you are an organic producer selling more than 40 percent of your output to Europe under previously mutually-recognised standards, then you’re probably going to find things very difficult; if you are a Greek-yoghurt importer, the supply of your product is likely to be severely disrupted. 
 
The obvious thing to do ahead of the 31st October deadline is, if you are importing ingredients from the EU, get as many as you can over here and stockpile them; if you are selling products to the EU, get as much as you can over there. But that’s costly, because you have to produce more, move more, pre-sell and store it. And in the UK there is no frozen or chilled storage space around 31st October, because most people booked that space two years in advance for their Christmas trade.
 
One of the other consequences of a potential no-deal Brexit is that it is very difficult to prioritise activity when there is so much going on that demands equally instant attention. Together with the constant pressure on margins our businesses face, that makes it very hard to find headspace, time and resources to cope with other challenges.
 
There are opportunities coming from scientific developments in our industry around nutrition, taste and cost, for example, innovative plant-based products, automation and the increasing willingness of UK consumers to try new foreign products. The UK food and drink industry is exciting and dynamic, but if we leave the EU without a deal we will face serious consequences.

 
Motie Bring, General Manager EMEA, Global Enterprise eCommerce, Worldpay, predicts new regulation in the payments industry will bring challenges but also opportunities for well-prepared businesses.
 
As a FinTech business in the buoyant payments industry we are very optimistic. The last decade has seen a shift in the way people are buying and I don’t see that changing.
 
We see the movement of consumers towards the e-comm environment continuing at the same pace. You have to include ‘m-comm’ in this now, as payment through different mobile devices is key to accelerating growth in the industry – Apple Pay, Google Pay, Amazon Pay, all these new methods are very successful adaptations.
 
Also, the new types of delivery services that are being offered, where purchases can reach you very quickly, with the convenience of it being at work or at home, are also changing the way that people behave.
 
From a European point of view, there are a lot of regulatory changes coming in which will also impact how customers purchase online, and these will probably dominate the industry over the next six to twelve months. For example, the rules around the level of fraud that issuers, acquirers and merchants can have will make it more prohibitive and cumbersome for consumers to complete transactions.
 
I think people adapt to anything, so I don’t expect transactions to fall, but I think we will see a change in the way people transact and what payment methods will be more suitable for the new regulatory environment. These challenges will bring opportunities, and those businesses which are more ready will use that to their advantage.
 
 
Emma Carroll, Senior Editor, Criticaleye 
 
 
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Next week's Community Update will explore the top priorities for leaders in Asia today.