2015 was quite a year – from a meltdown in oil to a Greek (near) tragedy to interest rate liftoff, quiet moments were a rare thing. With most of it in the rear-view mirror, our sights turn to what 2016 will bring. Earlier this month, Firmex released its quarterly report with Mergermarket on North American M&A and presented a cautiously positive outlook for 2016. Since other projections take different positions, cover other markets, and take various angles of analysis, we wanted to pull together reports and quotes from around the financial world to offer a bigger picture – whether good, bad, or ugly. Here’s what we found.
The optimists have spoken: America is back! A strong domestic economy is revving up the economic engines that are these United States. Plunging oil and natural gas prices have been passed on to consumers via savings at the pump and lower heating bills. Combined with a jobless rate that has dropped to 5%, consumer spending has seen a strong bump that looks to continue well into 2016. Additionally, wage pressures are building, which will put more money in the pockets of workers. All of this, combined with the long-telegraphed rate hike by the Federal Reserve, has brought the US Dollar to heights not seen in years, making imports cheaper and providing a much-needed boost to export-based economies.
It’s not just the USA that will drive global growth – stimuli from the ECB and Bank of Japan have been enacted in full force, with each central bank hoping to stoke inflation in their respective regions and awaken these economic giants. All-time lows for the euro and yen, what look to be the closing chapters of the Greek sovereign debt crisis, along with new trade agreements like the TPP could quickly turn this goal into a reality.
For M&A, foreign mergers are the most appetizing in this scenario. The much ballyhooed rise in the US dollar and corporate coffers flush with cash mean American businesses can go on an international shopping spree. According to Business Wire, several large players in the Consumer Products space are hunting for companies to acquire. Well-positioned companies domiciled in countries with less favorable currency outlooks may be encouraged to expand abroad quickly to exploit the exchange rate movements and diversify their revenue streams. Already, we’ve seen such plays with the AB Inbev SABMiller, and Three-O2 mega mergers.
“The move by Dexus Property Group to make a $2.5 billion cash and scrip bid for Investa Office Fund is a portent of more to come in the listed real estate investment trust (REIT) sector in 2016.” – Adele Ferguson, AFR
“Fears over falling returns on assets will prove overdone as firming GDP growth helps revenue.” – Goldman Sachs
“The overall outlook on the deal market is positive; it shows future activity and general enthusiasm for deal making.” – EY
A less sunny picture of 2016 is one that has it looking quite like 2015. A high US dollar, while undoubtedly good for US consumers of imported goods, is a thorn in the side of any US-based exporter. This would cause a dampening effect on international demand for US products and have ripple effects back home – a recovering US manufacturing sector shot in the foot by its own currency would surely slow the growth of much-needed well-paying jobs. Growth abroad would be sluggish, as QE efforts in Europe and Japan take more time than anticipated to gain traction, and geopolitical concerns weigh on risk appetites for businesses big and small alike.
In this outcome, consolidation is the name of the game for M&A activity. Periods of high growth in particular areas of the global economy have encouraged large swaths of players to enter the fray in sectors such as Financials, Telecom, Technology, and Oil and Gas Exploration. As growth slows down, smaller players will merge to allow them to continue to compete, or they may be swallowed up by the industry behemoths in the search for continued high growth. Even among the titans, consolidation is already being seen, with Dow and Dupont announcing a massive $130 billion merger. Other industries may encounter disruptive startups upending decades of entrenched business models, spurring established companies into deals to improve their staying power, as with the Mariott purchase of Starwood in the face of AirBnB.
“The SOE reforms and domestic industry consolidation are the other themes likely play out strongly next year.” – Brian Gu, China Investment Banking at JPM HK
“What we are forecasting is that the global growth will be pretty much in line with what we are seeing this year.” – Michael Taylor, Michael Taylor, Fitch
“Growth globally is lackluser in all key regions.” – Alex Tedder
Even without adding any so-called “Black Swan” events to knock the global economy completely off-course, 2016 could still surprise considerably to the downside. If US exports take a bigger hit than predicted from the pricey US dollar, and inflation remains heavily subdued, the Federal Reserve may be forced to backtrack on its rate hike. While in and of itself this is hardly cause for concern, the broader implication that the world’s largest economy still requires life support levels of monetary policy easing would send shockwaves of fear rippling through global markets. Less than stellar results in stimulus measures in both Japan and Europe have brought skepticism that the programs will work as intended, and instead may threaten financial stability by hampering liquidity in key markets. A more slowly expanding China, the last bastion of real global growth in the past 7+ years, would send commodity prices ever lower, knocking the wind out of any recovery for any economies who are still largely commodity-dependent – Canada, Norway, Russia, Brazil, Venezuela, Australia, and South Africa (to name only a few) would all feel the heat. A full-blown refugee crisis in Europe causing social unrest could scare off investment in the Eurozone, while the potential for an outsized influence of the hardline left-leaning Podemos party in Spain’s latest election would have people longing for the carefree days of a Greek sovereign debt crisis.
The next 365 days would be much like the dog-days after the crisis in this scenario: distressed assets would be picked up on the cheap by bigger players, and risk averse investors would funnel money into safer projects like Public Private Partnerships (P3s) in infrastructure and utilities. However, a small, nimble startup could sow the seeds for disruption, as industries focus on retaining profitability instead of funding research and development. As we’ve seen with Uber, AirBnB, and Spotify, such environments can pave the way to both stellar innovations and valuations.
“There’s really no sugar coating it — the 2016 outlook has taken a step back because of the latest plunge in resource prices.” – Douglas Porter, BMO
“So-called misguided fears about a recession in the U.S. and global economies in 2016 may not be so erroneous after all.” – John Whitefoot, Lombardi Financial
“The commodity-dependent countries, much of Latin America and Africa along with parts of Asia, are facing difficult times.” – Bill Conerly
“Evidence from China suggests the economy has been slowing down quite significantly.” Michael Taylor, Moody’s