Private Company Webcast Series Understanding the impact of foreign exchange on your private business 1 June 2016
Today’s presenters David Fabian Shaun Osborne Vincent Godin Director & Head – Partner and Managing Director & National Co-leader Chief Currency Commercial and Retail FX Strategist Private Mid-Market Scotiabank Global Practice Scotiabank Banking & Markets EY Page 2
Today’s agenda ► Examine results from EY’s most recent Global Capital Confidence Barometer ► Forecast and FX strategy ► Banking options available to help your business manage foreign exchange volatility ► Hedging strategies ► Closing thoughts Page 3
About the Barometer 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 | Page 4
Companies have accepted the reality of a prolonged low-growth environment What is your perspective on the state of the global economy today? Middle market up to US$3bn 1% Strongly improving 36% 22% 38% Modestly improving 48% 62% 47% Stable 8% (GDP Change = same growth as 2015) 14% 13% Modestly declining 7% 2% 1% Strongly declining Apr-16 1% Oct-15 0% Apr-15 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. 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.. Page 5
While capital markets have been more volatile, companies see no major systemic risks Please indicate your level of confidence in the following at the global level. Middle market up to US$3bn Corporate earnings Short-term market stability 44% 49% Positive 67% Positive 70% 70% 67% 50% 41% Stable 21% Stable 20% 29% 30% 6% 10% Negative 12% Negative 10% 1% 3% Equity valuations Credit availability 40% 48% Positive 54% Positive 72% 50% 69% 49% 42% Stable Stable 34% 23% 46% 28% Apr-16 10% 11% Negative Negative 12% 5% Oct-15 3% 4% Apr-15 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. Companies are not indicating any rapid deterioration in capital markets, such as credit markets freezing, which ► highlights that no massive systemic shocks are anticipated. Page 6
Increased global instability continues to dominate economic risks 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 Increased global and regional 30% political instability Increased volatility in 26% commodities and currencies Economic and political stability in the European 15% Union Timing and pace of interest 10% rate rises in the US Risk of global health 10% pandemics Slowing growth in China Apr-16 9% ► 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. Page 7
After a record 2015, M&A expectations ease, but with little sign of a major downturn What is your expectation for the M&A market over the next 12 months? 46% Improve 83% 49% 49% Stay the same 15% 49% 5% Decline 2% Apr-16 2% Oct-15 Apr-15 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. While there is an increase in the number of respondents predicting a decline, the big shift is towards a stable ► market. Page 8
Middle market companies continue to acquire as they look for new growth opportunities Do you expect your company to actively pursue acquisitions in the next 12 months? 77% 72% 71% 61% 47% 47% 46% 45% 44% 52% 39% 52% 35% 33% 47% 33% 27% 35% 35% 24% 32% 30% 23% 22% 22% 20% Middle market up to US$3bn Companies with a revenue size over US$3b 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 Deal intentions have slipped back since October 2015 for Middle market companies, while the largest ► businesses continue to have a strong appetite for deals. Companies are actively seeking out growth opportunities in a low-growth environment. ► The need to respond positively to disruption is also spurring dealmaking intentions. ► Page 9
Companies are evaluating assets in a range of top-tier developed and emerging markets 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)? 2. UK 5. Germany 1. US 4. China Top destinations 3. India Middle Companies with market up to a revenue size US$3bn over US$3b 1. US 1. US 2. UK 2. UK 3. India 3. India 4. China 4. China 5. Germany 5. Germany Top 5 destination countries 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. China and India also remain attractive destinations for investors, notwithstanding recent concerns about the ► wider Asia- Pacific region’s economic growth and stability. Page 10
Uneven global economic growth propels companies to look for options across the board 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 Cross-border 73% Domestic 27% 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. Companies continue to review portfolios and are focused as much on where they are operating as on what they ► are doing. Investing in emerging markets has become more focused; it is about finding the countries that provide the best ► outlook for each company’s products and services . Page 11
Companies continue to show robust discipline in dealmaking Have you either failed to complete or cancelled a If you answered yes, what was the primary reason? planned acquisition in the past 12 months? Middle market up to US$3bn 26% Gap between buyer and seller expectations too wide 85% 20% Yes 21% Issues uncovered during due 73% diligence 5% 20% Competition from other buyers 35% 15% 17% Concerns about regulatory or No antitrust reviews 28% 27% 16% Investor or board scrutiny 12% Apr-16 Oct-15 Companies are more prepared to walk away from deals that do not fulfil all their investment criteria. ► Increasing focus on thorough due diligence has led to the collapse of intended acquisitions. ► Companies are not willing to overpay for assets and are unwilling to compromise on price. ► Page 12
Forecast & FX strategy Page 13
Scotiabank Forecast 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 Page 14
SCOTIABANK FX STRATEGY Page 15
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Major Reversal Unfolds in USDCAD Page 31
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Global FX group – products Page 35
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