CEO briefing 2009: for corporate pioneers

January 2009

Silhouette on mountain peak

Introduction

Companies have been taking the strain as first the credit crunch and then a full-scale global economic slowdown have hit their balance sheets and their profits. As the effects of this situation are felt across the world, CEO Briefing examines how damaging the downturn has been so far, its probable impact during 2009 and how companies can position themselves to both weather the crisis and emerge positioned for growth.

This report presents the findings of an executive confidence survey, conducted during October and November 2008, the latest Economist Intelligence Unit forecasts from January 2009, and current Norton Rose Group insights on the key issues.

The world economy faces tough times ahead, with chief executives having to make the type of decisions they have not had to wrestle with for a generation. Without doubt, their mettle will be tested as they confront hard, unpalatable choices. There is light beckoning for some, however. Opportunities do exist for the right companies operating in the right markets – for those with strong stomachs and solid balance sheets. Corporate pioneers can exploit these.

CEO briefing 2009 is available in its complete form as a PDF (590KB).

Key findings

  1. A steep fall in business confidence epitomises the transition to 2009.
  2. Executives in financial services, transport and the retail and consumer goods sectors are most pessimistic.
  3. Companies are wary of the risks of doing business in the US.
  4. Cost control will be a key priority this year.
  5. The value of M&A deals will decline sharply in 2009, but CEOs from stronger, cash-rich businesses will face good value M&A opportunities.
  6. Most firms expect to continue investing.

Regional summaries

Asia Pacific (pdf, 201KB)
Europe (pdf, 200KB)
Middle East and North Africa (pdf, 205KB)
North America (pdf, 201KB)
Sub-Saharan Africa (pdf, 201KB)

Sector summaries

Financial institutions (pdf, 209KB)
Energy and infrastructure (pdf, 206KB)
Transport (pdf, 206KB)
Technology (pdf, 205KB)

What the experts say

Speakers’ slides from our London launch event on 20 January 2009.

  • Robert Ward (320KB) (.pdf), Director Global Forecasting, Economist Intelligence Unit
  • Dennis Turner (2455KB)(.pdf), Chief Economist, HSBC Bank Plc

Key findings

1. A steep fall in business confidence epitomises the transition to 2009.

CEO sentiment

At the start of 2007, nearly 90% of chief executives were confident about the outlook for their companies, but this plummeted to just over 50% by November 2008. Europeans were the most pessimistic about the outlook for the year ahead, with 28% expecting 2009 to be “bad” or “very bad”, followed by 23% of respondents in North America. Sub-Saharan Africa has the most bullish outlook, with 83% of executives considering the prospects for 2009 as “good”.

Economist Intelligence Unit forecast

The health of the global economy deteriorated sharply in November and December 2008. The Economist Intelligence Unit now expects that the global economy will contract in 2009
by 0.9%. Although growth will resume in 2010, the pick-up will still be slower compared with either of the two recent recessions in 1991 and 2001. At purchasing power parity (PPP),
the world economy will expand by 0.2% in 2009, the slowest rate of increase since the early 1980s, and by 2.4% in 2010. See Section 1: the global marketplace/EIU forecast in the main report for more detailed information.

Norton Rose Group insight

The decline in confidence is hardly surprising given the unprecedented six months in Europe and the US. There is a real feeling of “what next?”; until this lifts, the gloom will continue,
and uncertainty over which companies remain viable will continue to cloud the scene. In the weeks to come, auditors will be looking for robust evidence that the business is a going concern before they issue their audit opinion. It is clear that there is significant pain to come for all, but particularly for SMEs that rely upon credit lines from banks which will be instructed to prioritise tier one borrowers. Many will be lost. Many will have to sell core businesses to create the necessary cash to survive the crunch. This in itself will create opportunities. Growth in these distressed sales should highlight the bottom of the cycle.

We have already seen a pick-up in activity by Chinese and African institutions using the lack of traditional liquidity as an opportunity to build key banking relationships. Even with the massive drop in the price of base metals, China will continue to finance the development of key African countries.

2. Executives in financial services, transport and the retail and consumer goods sectors are most pessimistic.

CEO sentiment

From the companies surveyed, the retail and consumer goods sector, financial services firms and the transport industry are the most pessimistic, with 25%, 31% and 34% of respondents in those sectors, respectively, describing the outlook for 2009 as “bad” or “very bad”. On the other hand, more than half of the respondents from technology companies (54%), as well as energy and infrastructure firms (57%), are relatively upbeat. Technology companies are likely to be optimistic on the back of greater prospects for automation as firms seek to cut costs, while the infrastructure sector will seek to benefit from a renewed focus on infrastructure spending as a source of job creation during a downturn.

Economist Intelligence Unit forecast

Financial markets remain largely frozen, notwithstanding a sharp decline in interbank rates in some countries, with credit markets still characterised by high levels of risk aversion. A “normalisation” of financial conditions is not expected until 2010 at the earliest – and will not mean a return to the lending environment that prevailed until the August 2007 crash. Beyond this, world trade is expected to contract by 2% in 2009, as import demand from the US, the euro area and Japan collapses. This will hurt shipping companies and others within transport and logistics, as well as retailers.

Norton Rose Group insight

Transport is a capital intensive business that relies heavily on both the debt and capital markets. Notwithstanding government intervention in many of the world’s developed economies, these markets are, on the whole, closed for business. The airline industry, which is very much consumer- and demand-driven, is going through a particularly challenging period. The shipping industry finds itself in an extremely difficult position, on the whole. Shipping companies have, in some sectors, seen a collapse in the earnings of their vessels amounting to over 90%.

However, there are areas of optimism. Activity in the rail sector, at least in the UK, remains buoyant – although this is largely due to existing Government commitments to develop and expand various rail networks. The shipping and airline industries are by their very nature global businesses, and there are many jurisdictions around the world with the money and the stated intent to grow these industries. Abu Dhabi, Oman and Qatar are obvious examples. It is also clear that there is likely to be important consolidation in the airline industry, which can only strengthen it.

3. Companies are wary of the risks of doing business in the US.

CEO sentiment

The US, the rock of the global free market economy for a century, is now viewed by the majority of respondents as the riskiest place to do business. Companies globally consider North America the greatest source of operational and financial risk. Asian companies are noticeably wary about the risks involved in doing business in North America, although concerns are highest among US companies themselves.

Economist Intelligence Unit forecast

The indications are that the current US downturn is shaping up to be one of the longest since the Great Depression. Recovery will not set in until the second half of 2009, buoyed by further fiscal stimulus measures. However, even then, the rate of expansion is likely to be sluggish, reflecting both ongoing adjustment in the housing sector and the slow rebuilding of household balance sheets. The sharp deterioration in labour market conditions since end-2007 also augurs ill for consumer sentiment.

Norton Rose Group insight

From a business perspective there are, however, some grounds for optimism. The start of Barack Obama's Presidency of the United States will, in all likelihood, herald an initial wave
of optimism. This, coupled with fiscal and other measures, is likely to result in a more positive consumer sentiment, providing a short-term stimulus to the economy.

The strength of the US dollar means that western Europe is once again a comparatively cheap place for American companies to do business. On this basis, as liquidity returns to the banking sector during 2009, we are likely to see increasing investment from US businesses in Europe.

Although many of our respondents were concerned about the risks of doing business in the US, this is, in our view, unlikely to deter them from doing business there. As a new regulatory framework is assembled under the new administration, we expect to be busy continuing to advise our clients on how to interpret the new regulations and the practical implications for their businesses.

4. Cost control will be a key priority this year.

CEO sentiment

The way companies are being managed has changed dramatically inside a year. A focus on costs rather than top-line growth is the main priority of chief executives for 2009. By contrast, in 2007 few companies viewed good housekeeping as a prime consideration. Nearly one-quarter of chief executives will reduce their payrolls this year, while over one-half aim to conserve cash by streamlining internal processes. Nearly one-quarter will increase their use of IT to automate processes in a bid to bring costs down. One in four firms expect to make cuts in their levels of staffing.

Economist Intelligence Unit forecast

For many firms in developed markets, jobs will be the obvious source of cost cuts. In the US, unemployment will continue to rise sharply in early 2009 following the loss of more than half a million jobs in December, as the travails in the financial sector take their toll on the real economy. Employment in the UK has also started to fall, with the rate of unemployment expected to rise sharply, topping an average of 9% of the labour force in 2010.

Norton Rose Group insight

As businesses seek to drive costs down by reducing headcount, they will encounter various regulatory issues at a national and transnational level. Significant costs will be incurred by those businesses failing to comply with such regulations.

In addition, the manner in which headcount is reduced is often fraught with reputational risk. Notwithstanding the need to reduce costs in a short space of time in order to remain competitive, businesses must consider their future requirements; how they are seen to treat the workforce now will affect their ability to increase headcount in a rising market when there is increased competition for talent. In the fight for talent which we have witnessed over the last decade or more, significant resources have been focused on employee engagement: these efforts will have been wasted if employers fail to manage effectively, and legally, the reduction of their workforce.

5. The value of M&A deals will decline sharply in 2009, but CEOs from stronger, cash-rich businesses will face good value M&A opportunities.

CEO sentiment

41% of companies polled had completed a deal in the past 12 months, with North America the least active region. But, perhaps in anticipation of cheaper assets this year, nearly
one-half of the companies surveyed say they will be involved in M&A in the next 12 months and over one-fifth believe they will complete two to five deals.

Economist Intelligence Unit forecast

Mergers and acquisitions (M&As) have been hit hard by the lack of credit, declines in equity markets, the ever-worsening global economic outlook and plummeting confidence. Global M&As are expected to decline to about US$2 trillion in 2009, from an estimated US$3.1 trillion in 2008 and a record total of US$4.4 trillion in 2007. A few mitigating factors will help limit the drop, though. For example, companies with cash can take advantage of low equity valuations; aggressive interest rate reductions should ease the credit crunch to an extent; and consolidation trends in financial services, as well as energy, healthcare and media, are likely to continue.

See Section 3: mergers and acquisitions/EIU forecast in the main report for more detailed information.

Norton Rose Group insight

2009 is likely to see some opportunistic M&A activity for those companies fortunate enough to have the characteristics identified by the Economist Intelligence Unit forecast. However, this will involve directors and shareholders making difficult judgement calls about the deployment of scarce capital. Calling the bottom of the market will also require steady nerves. 2009’s opportunities will arise as companies in financial difficulties seek to shore up their balance sheets with non-core business disposals.

6. Most firms expect to continue investing.

CEO sentiment

Despite the difficult macroeconomic backdrop, many companies will continue to invest. A rising number of companies plan to invest in sales and marketing and R&D in 2009 compared with 2007, suggesting that they have ambitions beyond short-term survival. In terms of where the opportunities lie, they are convinced that Asia will continue its growth path and represents the best region for sales and profits growth in the future. Asia is singled out as the most popular destination for new investment in the next 12 months.

Economist Intelligence Unit forecast

Although Asia will remain the fastest-growing region, the pace of its slowdown will be pronounced. Growth in the region (excluding Japan) will decline sharply in 2009 to just over 3%, with only a moderate recovery to just under 5% in 2010. China and India will still grow rapidly, but at much lower rates than in recent years. Fundamentals for many countries in the region, such as bank lending growth, current-account balances and foreign-exchange reserve levels, have improved dramatically since the last financial and economic crisis in 1997–98, although this has not stopped many countries from being cut off from access to foreign capital.

See Section 1: the global marketplace/EIU forecast in the main report for more detailed information.

Norton Rose Group insight

The current economic slowdown is likely to accelerate the long-term, generational shift in the world economic balance of power from West to East. Opportunities will undoubtedly arise for strategic and opportunistic investments and acquisitions in Asia at attractive long-term valuations. Careful structuring of such investments in jurisdictions which often have extensive foreign ownership restrictions or other regulatory hurdles is essential to achieve maximum value.

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Background

At Norton Rose Group we aim to find the right solution for our clients’ business needs. On our behalf, the Economist Intelligence Unit approached over 900 senior executives across a range of industries and markets worldwide and spoke in depth with 19 CEOs and other senior executives to find out their take on the global economy following the fiscal and economic turmoil of 2008. We commissioned this report for two reasons. We wanted, naturally enough, to check firsthand how our clients are experiencing the recession and what their plans are over the next twelve months. We also saw this as an opportunity for us to act as a conduit and let our clients and other major corporates know what their peers are thinking.

One of the findings that came out of these conversations - one of the chinks of light - was the emphasis on maintaining confidence and on investing for the future (through R&D and other measures). Market confidence has certainly taken a beating in 2008 but there is reason to hope that 2009 will see it re-establish itself. The business landscape looks set to change, possibly in radical measure, with scope for new thinking, new models and new opportunities.

The briefing covers issues around the global marketplace, identifies opportunities and risks, looks in particular at the health of the M&A sector and examines prospects for the immediate future. We trust that it will make interesting reading and be of use to you.

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Contact

Paul Beattie
Senior business adviser
Norton Rose LLP
Tel +44 (0)20 7444 2985
paul.beattie@nortonrose.com

CEO Briefing 2009

Full report available online and on request from CEOBriefing@nortonrose.com

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