Private Company Webcast Series Understanding the impact of foreign - - PowerPoint PPT Presentation
Private Company Webcast Series Understanding the impact of foreign exchange on your private business 1 June 2016 Todays presenters David Fabian Shaun Osborne Vincent Godin Director & Head Partner and Managing Director &
Understanding the impact of foreign exchange on your private business
1 June 2016
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David Fabian Partner and National Co-leader Private Mid-Market Practice EY Shaun Osborne Managing Director & Chief Currency Strategist Scotiabank Vincent Godin Director & Head – Commercial and Retail FX Scotiabank Global Banking & Markets
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► Examine results from EY’s most recent Global Capital
► Forecast and FX strategy ► Banking options available to help your business manage
► Hedging strategies ► Closing thoughts
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EY’s Capital Confidence Barometer is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). The respondent community comprises an independent EIU panel of senior executives and select EY clients and contacts. Our 14th Barometer provides a snapshot of our findings, gauges corporate confidence in the economic outlook, and identifies boardroom trends and practices in the way companies manage their Capital Agenda.
EIU panel of more than 1700 executives surveyed in February and March 2016 |694 executives from Companies with a revenue size over US$3bn and 1093 executives from Middle market up to US$3bn | Companies from 45 countries | Respondents from 18 industry sectors | 885 CEO, CFO and other C- level executives |
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1% 38% 47% 13% 1% 36% 48% 8% 7% 1% 22% 62% 14% 2% 0% Strongly improving Modestly improving Stable Modestly declining Strongly declining Apr-16 Oct-15 Apr-15
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Having accepted that global economic growth is unlikely to accelerate in the near term, companies are looking for new avenues to enhance their revenues and protect their earnings.
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A rigorous focus on costs and efficiencies, combined with bold organic and inorganic growth plans, is a prerequisite for surviving in a low-growth, low-inflation, low-interest-rate environment.. What is your perspective on the state of the global economy today?
Middle market up to US$3bn
(GDP Change = same growth as 2015)
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The shift towards a stable outlook in capital markets indicators, especially corporate earnings, reflects the view that there is little likelihood of the global economy accelerating in the near term.
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Companies are not indicating any rapid deterioration in capital markets, such as credit markets freezing, which highlights that no massive systemic shocks are anticipated. Please indicate your level of confidence in the following at the global level.
Corporate earnings Short-term market stability Equity valuations Credit availability
Middle market up to US$3bn 44% 50% 6% 67% 21% 12% 70% 29% 1% Positive Stable Negative 40% 49% 11% 54% 34% 12% 50% 46% 4% Positive Stable Negative 49% 41% 10% 70% 20% 10% 67% 30% 3% Positive Stable Negative 48% 42% 10% 72% 23% 5% 69% 28% 3% Positive Stable Negative Apr-16 Oct-15 Apr-15
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► Heightened global and regional political instability, especially in the Middle East and South China Sea, are the
key risks to many businesses.
► Continuing volatility in commodity and currency markets affect companies’ ability to plan in the near term. ► The myriad challenges facing the European Union, including the UK referendum and refugee crisis, are of
concern for companies. What do you believe to be the greatest economic risk to your business over the next 6–12 months?
Middle market up to US$3bn 30% 26% 15% 10% 10% 9% Increased global and regional political instability Increased volatility in commodities and currencies Economic and political stability in the European Union Timing and pace of interest rate rises in the US Risk of global health pandemics Slowing growth in China Apr-16
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The continuation of a steady stream of dealmaking in the first months of 2016 has reassured companies that the deal markets are unlikely to suffer a big drop after a record 2015.
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While there is an increase in the number of respondents predicting a decline, the big shift is towards a stable market. What is your expectation for the M&A market over the next 12 months?
46% 49% 5% 83% 15% 2% 49% 49% 2% Improve Stay the same Decline Apr-16 Oct-15 Apr-15
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Do you expect your company to actively pursue acquisitions in the next 12 months?
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Deal intentions have slipped back since October 2015 for Middle market companies, while the largest businesses continue to have a strong appetite for deals.
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Companies are actively seeking out growth opportunities in a low-growth environment.
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The need to respond positively to disruption is also spurring dealmaking intentions.
61% 35% 32% 35% 22% 22% 23% 20% 24% 30% 47% 52% 33% 52% 46% 44% 45% 39% 27% 33% 47% 35% 47% 71% 72% 77% Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Middle market up to US$3bn Companies with a revenue size over US$3b
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Companies with a revenue size
Middle market up to US$3bn
Top destinations
Top 5 destination countries
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Stronger growth in the United States and United Kingdom and the attractiveness of high-quality assets in Germany are making these countries popular destinations for investment.
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China and India also remain attractive destinations for investors, notwithstanding recent concerns about the wider Asia-Pacific region’s economic growth and stability.
Which are the top destinations in which your company is most likely to pursue an acquisition in the next 12 months (including your domestic market)?
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Companies continue to review portfolios and are focused as much on where they are operating as on what they are doing.
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Investing in emerging markets has become more focused; it is about finding the countries that provide the best
Which are the top destinations in which your company is most likely to pursue an acquisition in the next 12 months?
Middle market up to US$3bn 73% 27% Cross-border Domestic
Survey respondents were asked to rank their top three destinations of choice for investments. Those that chose their headquarter country as first choice were considered as being primarily focused on domestic acquisitions.
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Companies are more prepared to walk away from deals that do not fulfil all their investment criteria.
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Increasing focus on thorough due diligence has led to the collapse of intended acquisitions.
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Companies are not willing to overpay for assets and are unwilling to compromise on price. Have you either failed to complete or cancelled a planned acquisition in the past 12 months? If you answered yes, what was the primary reason?
Middle market up to US$3bn 85% 15% 73% 27% Yes No 26% 21% 20% 17% 16% 20% 5% 35% 28% 12% Gap between buyer and seller expectations too wide Issues uncovered during due diligence Competition from other buyers Concerns about regulatory or antitrust reviews Investor or board scrutiny Apr-16 Oct-15
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FX GROWTH 2015 2016f 2017f 00-14 2015f 2016f 2017f USDCAD 1.38 1.30 1.25 US 1.9 2.4 2.2 2.7 CADUSD 0.72 0.77 0.80 Canada 2.2 1.2 1.3 2.5 USDMXN 17.21 17.90 17.21 Mexico 2.3 2.5 2.5 3.5 EURUSD 1.09 1.02 1.12 Euro Zone 1.2 1.5 1.6 1.7 GBPUSD 1.47 1.40 1.50 UK 1.8 2.2 1.9 1.9 USDJPY 120 118 125 Japan 0.9 0.5 0.7 0.6 USDCNY 6.49 6.70 6.65 China 9.7 6.9 6.4 6.2 INFLATION 2015f 2016f 2017f INTEREST RATES US 0.4 2.2 2.3 Q415 Q416 Q417 Canada 1.3 2.0 2.2 FED 0.50 1.00 2.00 BoC 0.50 0.50 1.00 COMMODITIES - Yearly averages ECB 0.05 0.05 0.05 Oil (WTI) 49 37-42 47-52 BoE 0.50 0.50 0.75 Gold 1,160 1,190 1,250 RBA 2.00 1.75 1.75
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SCOTIABANK FX STRATEGY
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Major Reversal Unfolds in USDCAD
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Annual amount of exposure in dollars
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Importance of exposure relative to business, sales and net profit
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Volatility of cash flows
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Break-even exchange rate
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To eliminate all foreign exchange risk
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To protect against downside risk only
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To minimize foreign exchange costs
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Current economic fundamentals (geo-political situations)
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Current technical levels and trends
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Reaching objectives
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Changes in objectives, risk elements, markets
Objectives Strategies Execution & Evaluation Risk Elements
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The suitability of each alternative depends on:
SPOT Bullish view on USD vs. CAD FX Exposure FORWARDS Bearish view on USD vs. CAD OPTIONS Uncertain view
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At expiry date:
1.3425 1.2975 Buy USD @ Spot Buy 1MM @ 1.3425 Buy 1MM @1.2975
Expiry Date Forward Floor Rate Strike Rate Notional Amount Next 12 months 1.3150 1.2975 1.3425 1MM Advantages Disadvantages
Full protection against moves higher in USDCAD above the Strike Rate Give up some of the potential USD depreciation in return for full protection Participation in USD depreciation down to the Floor Rate Leaves uncertainty in the dealing rate Worst-case scenario known from the outset (can be considered as “insurance” against USD strength) No premium is required
received by selling the Put option
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At expiry date:
1.3025 Buy USD 1MM @ 1.3025 Buy USD 2MM @ 1.3025
Expiry Date Forward Strike Rate Notional Amount Next 12 months 1.3150 1.3025 2MM or 1MM Advantages Disadvantages
Client receives full protection at the Strike Rate, regardless
The amount of USD purchased at the Strike Rate is not known until Expiry Client receives a Strike Rate that is better than the Outright Forward Rate Leaves uncertainty in the dealing amount Worst-case scenario known from the outset (can be considered as “insurance” against USD strength) No premium is required
received by selling the Put option
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Provides a client with full protection on their exposure at a known Strike Rate and the ability to benefit from favorable market movement on half of the exposure. The amount of participation from favorable rate movement is unlimited on half of the total exposure. Date Forward Strike Rate Notional Amount Participation Amount Next 12 months 1.3150 1.3295 1,000,000 500,000
Buy USD 500K at 1.3295, Remainder at Spot Buy USD 1MM at 1.3295
1.3295
Advantages Disadvantages
Clients receive full protection at the Strike Rate, regardless
(Strike Rate) is higher than the Forward (at trade inception) Clients can benefit from unlimited favorable rate movement
This strategy requires no premiums to be paid up front
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The Swing Forward is an FX hedging strategy that provides a client with full protection on their exposure at a known Strike Rate and the ability to benefit on favorable market movement up to a pre- determined level, known as the Barrier Rate. If the USDCAD rate is at or above the Barrier Rate at expiry, the client will be obliged to sell the USD amount at the Strike Rate.
regardless of spot rate movement
level.
up front and doesn’t incorporate leverage.
Advantages Disadvantages
DATE Spot Rate Strike Rate Barrier Rate Next 12 months 1.3150 1.2975 1.3900
Sell USD 1MM @ 1.2975 Sell USD 1MM @ 1.2975
1.2975
1.3900
Sell at Spot
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Scotiabank | Global Banking and Markets 40 King Street West 68th floor Toronto, Ontario, Canada M5H 1H1 Vincent Godin, MSc, CFA Director and Head, Commercial and Retail FX Global Foreign Exchange 416.862.3213 vincent.godin@scotiabank.com Shaun Osborne Managing Director & Chief Currency Strategist Global Foreign Exchange 416.945.4538 shaun.osborne@scotiabank.com David Fabian Partner and National Co-leader Private Mid-Market, EY 416.932.6250 david.fabian@ca.ey.com