There has, understandably, been a great deal of attention paid to the EU referendum debate, both in the UK and in many other economies with an interest in sterling. But while the referendum is certainly a highly significant constitutional event, and one which warrants the attention it has been receiving, it is just one of many uncertainties that surround the global economy.
In the context of many global UK-centred businesses, the conundrums around timing for expansion or contraction, when to take on higher leverage or hoard cash, when to lock in borrowing rates, and when to press the button on strategic M&A will still be with us post-summer. The absolute buying power of a sterling-based company may be affected in a Brexit scenario, but the core factor determining the business plans of any corporate finance decision-maker will be how the global economy behaves in the coming year or two.
Confidence in the US and Chinese economies, and how emerging markets cope under the strain of significantly lower year-on-year commodity prices, will continue to play a far greater role in the decision-making of the largest business names in the UK, not least because these markets are the key drivers of global market sentiment.
Net corporate borrowing activity has widely been reported to have fallen year-on-year. This is borne out by significantly less M&A and reduced overall EMEA market borrowing volumes in both loan and bond markets. Cash levels in both the corporate and private banking sectors are high, with borrowing margins at close to 2015 lows and banks eager to put balance sheets to work.
M&A bankers rolled up their sleeves in 2015, preparing for a deluge of activity as sentiment improved, but the catalyst for action is yet to be seen. And if one strips out M&A-related volumes in European corporate bond markets, despite extraordinarily low rates in core currencies, activity in investment grade financing is (30 per cent) down year-on-year.
This is not due to the EU referendum, but a broader statement on Corporate Europe’s uncertainty over the direction of global travel.
With 10 year Bund levels at below 0.25 per cent, UK gilts levels around 1.5 per cent and the 10 year Treasury hovering just above 1.75 per cent, markets continue to reflect nervousness around growth and any thought of material inflation. The recent Chinese growth numbers, impressive by Western standards, do not themselves look strong enough to propel the major economies back on track for the moment.
However, let’s be clear: set against this, opportunities abound for those with glasses half-full. As stated above, bank liquidity remains exceptionally robust and ready to be deployed, institutional activity is highly skewed to the buy-side of credit markets should well-placed corporates decide to pull the trigger, and behind-the-scenes preparation on both M&A and capex spend in many corporate boardrooms is frenetic. The right time to invest will depend on industry and boardroom dynamics, but waiting for all the “known unknowns” to clear will be too late, with sentiment improvement inevitably leading to higher rates and a more crowded funding playing field.
Remain or Leave, strategic corporate activity will continue. The EU referendum will focus the mind for the next few months for many of us sitting in the UK, but the real market drivers for the foreseeable future lie way beyond our borders.