Outlook for global economies more buoyant than downbeat claims new survey

BY Fraser Tennant

More buoyant than downbeat is the assessment of executives as to the outlook for both global and domestic economies over the next 12 months, according to McKinsey's latest economic conditions survey.

In its ‘Economic Conditions Snapshot, June 2017’, McKinsey notes that executives view geopolitical instability and terrorism as steadily growing threats to the global economy. Furthermore, they consider geopolitical instability to be the risk most often identified as a threat to near-term global growth in every region.

According to the McKinsey survey, the top five ‘potential risks to global economic growth over the next 10 years’ are: (i) geopolitical instability in the Middle East and North Africa; (ii) threat of terrorist attacks: (iii) slowdown in China’s economic activity; (iv) rising income inequality; and (v) volatility across global financial markets.

Additional concerns expressed by executives include transitions of political leadership and changes to trade policy, as well as social unrest (the survey found that respondents in developed Asia, India and North America were the most likely to cite this). Moreover, the number of executives in Asia that identified social unrest as a global risk has more than doubled since March 2017 (up from 14 percent to 32 today) – a figure that has tripled in other developing markets (up from 4 percent to 12 percent).

Despite these continuing threats and uncertainties, executives stated that they remain buoyant about economic conditions in their home countries, with those in Europe more likely to expect improvements. Executives in North America, in comparison, were less confident. At the same time, respondents in emerging markets and developed markets have reported new divergences in their views on trade, company profits and customer demand.

“Respondents are as bullish on the global economy as they were three months ago, with nearly half saying that global economic conditions have improved in the past six months,” states the McKinsey survey. “On the global economy’s prospects, too, respondents are more positive than negative. Nearly equal shares of executives say global conditions have improved and expect conditions will continue improving in the next six months”.

Looking ahead, 39 percent of executives say they are optimistic about the long-term prospects for the world economy, basing their belief on “pockets of growth” scenarios – characterised by high but uneven and volatile global growth. That said, the survey still makes clear that respondents are equally divided on whether or not global conditions will improve during the next few months.

Report: Economic Conditions Snapshot, June 2017: McKinsey Global Survey results

Mega deals boost H1 global M&A activity, reveals new report

BY Fraser Tennant

Mega deals across the globe boosted the value of mergers & acquisitions (M&A) activity to bumper levels in H1 2017, with Europe a particular hotspot, according to a report released by Mergermarket this week.

The report, ‘Global and regional M&A: H1 2017’, reveals that although deal volume has remained low, aggregate deal value so far this year has been the opposite – due largely to the significant number of mega deals struck.

The key data in the Mergermarket report shows that: (i) 17 mega deals have been announced since the beginning of the year (including Amazon’s recent takeover of Whole Foods), as companies look to ‘future-proof’ in the wake of rapid change to technology and politics to keep ahead of rivals; (ii) the consumer sector has seen six megadeals in H1 2017, in comparison to just one during the entirety of 2016; (iii) European M&A has surged ahead, securing 32.3 percent share of global value, while both the US and Asia Pacific have seen their share drop; and (iv) the energy, mining & utilities sector has been the most targeted industry, partially fuelled by some stabilisation of oil prices.

 “The first six months of 2017, and particularly the second quarter, has seen a clear resurgence in European M&A activity,” said Jonathan Klonowski, Europe, the Middle East and Africa (EMEA) research editor at Mergermarket. “The year started with worry over potential populist shocks but there now appears to be greater confidence in the market.

“M&A activity in the first six months of 2017 has seen firms look to adapt to changes, both in terms of politics and technology. The result has seen values increase to $1.49 trillion, an increase of 8.4 percent despite there being 1117 fewer deals in comparison to H1 2016. A key driver of this has been the increase in megadeals (with a value of $10bn) – with 17 in the first half of this year in comparison to 14 in H1 2016.”

Additional findings in the report are that the US and Asia have stagnated slightly, and despite the year starting with worry over potential populist shocks, there now appears to be greater confidence in the market following elections in France and the Netherlands.

Mr Klonowski concluded: “While volumes remain relatively low, values have continued to soar and there is no obvious reason why this should not continue for the rest of the year.”

Report: Global and regional M&A: H1 2017

Out of the shadows

BY Richard Summerfield

The ‘shadow banking’ system, which sees unregulated financial institutions offering lending and other financial activities under unregulated conditions, has been a major issue in the financial services space for many years, and is believed to have been a key catalyst for the financial crisis which began a decade ago.

However, according to Mark Carney, governor of the Bank of England and outgoing chairman of the Financial Stability Board (FSB), shadow banking, which has remained a key threat to global financial stability, has finally been tamed thanks to a series of fundamental reforms across the financial services space. Mr Carney suggests the world’s biggest banks are stronger, misconduct is being tackled, and the toxic forms of shadow banking are no longer a threat to the global economy. Though the shadow banking system has grown in recent years, according to Mr Carney, the industry’s more toxic elements have been marginalised by increased regulation in areas such as money markets and securitisation.

At a press conference on Monday, Mr Carney said that though shadow banking has been largely tamed it will continue to represent an ever present and changing threat. “Toxic forms of shadow banking at the centre of the crisis no longer represent a global financial stability risk. The remaining shadow banking activities are now subject to policy measures to reduce their risk and reinforce their benefit allowing for more diverse and resilient forms of market based finance. Shadow banking activities will inevitably evolve, so FSB member authorities must continue to strengthen their surveillance, data sharing and analysis in order to support the risk assessments and any future regulatory response that may be required,” he said.

Indeed, regulators must remain vigilant in the coming years if the threats posed by shadow banking are to be kept in check. The spectre of ‘reform fatigue’ must be fought off, says Mr Carney, as the next round of banking reform, including increased transparency regarding the over-the-counter derivatives markets, kicks in. Mr Carney also called for the next-step Basel III banking reforms to be completed “urgently and then implemented faithfully”.

Though there is more work to be done, significant steps have been taken to reform global banking in the 10 years since the crisis began. Banks are stronger, have better liquidity and are subject to greater and more stringent regulation. Shadow banking is still an issue but its influence has waned.

News: Toxic forms of shadow banking' no longer represent a global financial stability risk, says international watchdog

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‘Petya’ cyber attack affects thousands

by Richard Summerfield

Fresh off the heels of the ‘WannaCry’ ransomware attack, a fresh global cyber attack disrupted computers across the world on Tuesday and Wednesday. Russia's biggest oil company, Ukrainian banks and multinational firms across Europe, the US and the Asia-Pacific region were affected.

The latest attack, known as ‘Petya’ or ‘GoldenEye’, included code known as 'Eternal Blue', which cyber security experts believe was stolen from the US National Security Agency in April and was also used in WannaCry. It is the Eternal Blue code which facilitated the speed of the assault. Indeed, the attack spread rapidly, affecting machines running Microsoft’s Windows operating systems, encrypting hard drives and overwriting files before demanding $300 in bitcoin payments to restore access. "We are continuing to investigate and will take appropriate action to protect customers," a spokesman for Microsoft said.

Globally, Russia and Ukraine were most affected by the thousands of attacks, according to Kaspersky Lab. In Ukraine, government systems as well as banks, state power utilities and Kiev’s airport and metro system were all affected. Elsewhere, advertising giant WPP, French construction materials company Saint-Gobain, Danish shipping giant Maersk, US pharmaceutical company Merck, Russian steel and oil firms Evraz and Rosneft, and the Australian manufacturing facilities of the Mondelez owned Cadbury’s chocolate factory, along with many others, were all affected. In total, more than 2000 organisations are believed to have been hit.

The effectiveness of this latest attack, and the speed at which it has spread, so soon after the WannaCry attack, is cause for alarm among companies, cyber security professionals and the general public.

After the WannaCry incident, governments, security firms and industrial groups advised businesses and consumers to make sure all their computers were updated with Microsoft patches to defend against the threat. This latest attack, believed to be smaller than WannaCry, could be more harmful than its predecessor as it renders computers unresponsive and unable to reboot. The resourcefulness of the attackers is also a concern for cyber security professionals, particularly as Petya does not appear to have the same ‘kill switch’ which was used to neutralise the WannaCry attack.

Though they are not a new development, ransomware attacks are becoming more frequent. The Petya attack is yet another reminder that many organisations are neglecting to patch their systems, allowing malicious actors to exploit weaknesses. Companies must do more to protect their networks, their data and, ultimately, their cash.

News: New computer virus spreads from Ukraine to disrupt world business

Russian oligarch swoops for Holland & Barrett in £1.8bn deal

BY Fraser Tennant

Helping itself to a big slice of the growing £10bn health and wellness market, investment fund L1 Retail has acquired Holland & Barrett from US private equity firm The Carlyle Group for £1.8bn.

Acquired by Carlyle in 2010 as part of its purchase of Nature's Bounty Co. (now NBTY), Holland & Barrett has experienced growth of over 90 percent in the years since Carlyle first invested in the brand. Founded in 1870, Holland & Barrett has stores in more than 1150 locations worldwide, a significant rapidly expanding online ecommerce capability and a global employee base of more than 4200 associates and staff.

"We are delighted to now be in partnership with the L1 Retail team and its advisory board of internationally-renowned retailers,” said Peter Aldis, chief executive of Holland & Barrett. “We have upgraded much of our core store portfolio to concept stores to deliver additional in-store theatre and increased customer engagement. New products launched through our ethical sourcing programme have also been a key growth driver helping to underpin our substantial investment to gain presence across an increasingly global health and wellness market.”

The fund acquiring Holland & Barrett, L1 Retail, is the retail investment arm of the LetterOne Group, an international investment business headquartered in Luxembourg. Controlled by the Russian billionaire Mikhail Fridman, the acquisition of Holland & Barrett is the first deal undertaken by his L1 Retail vehicle (further diversification has seen Mr Fridman set up L1 Technology and L1 Health).

"Holland & Barrett is a clear market leader in the UK health and wellness retail market, with attractive growth positions in other European and international markets, and growing online presence, with a leading customer loyalty programme and 10 million active cardholders,” said Stephan DuCharme, managing partner at L1 Retail. “We believe that the company is well positioned to benefit from structural growth in the growing health and wellness market and has multiple levers for long term growth and value creation."

Advising Carlyle during the sale to L1 Retail was Goldman Sachs, Houlihan Lokey, UBS, PwC, Latham Watkins LLP and OC&C. The transaction is expected to close by September 2017 subject to customary regulatory approvals. 

Mr Aldis concluded: “Carlyle has been a great partner for Holland & Barrett over the last few years and we look forward to building on this track record as we enter the next chapter with L1 Retail."

News: Holland & Barrett sold for £1.8bn to Russian billionaire