October 2019 | 21st edition | ey/CCBGlobal Capital Confidence BarometerM&A response or resilience?The prolonged upward trend for dealmaking is set to continue despite geopolitical and economic concerns.64%are actively planning to respond to ongoing geopolitical, trade and tariff concernsAction outweighs uncertainty in the C-suite 54%do not expect an economic slowdown in the near to mid term and the majority remain optimistic in the near-term economic outlook.52%are planning to actively pursue M&A in the next 12 monthsM&A intentions remain strong 68%are expecting the M&A market to improve in the next 12 months and the C-suite predicts the prolonged dealmaking upcycle will continue.61%of companies have difficulties securing the right talentFinding the right talent and technology at speed is driving deals 84%already have or plan to have social value reporting metrics in place in the next year as executives articulate long-term value beyond traditional financial metrics. 2 Macroeconomic and external environment4 Responding to growth challenges6 Spotlight: the tech effect8 M&A outlook12 Geographic outlook14 Sector outlook15 Spotlight: corporate purpose16 Key takeawaysContentsGlobal Capital Confidence Barometer | 1Understanding the route to growth: building optionality into strategic decisionsIn todays environment, it appears that the only certainty is uncertainty. The latest EY Capital Confidence Barometer finds executives dealing with numerous interconnected challenges and proactively managing them.The strategic objective is clear finding growth. But geopolitical risks, the recasting of trade and tariff rules, zigzagging monetary policy, technology and innovation, as well as evolving regulatory policies, offer obstacles. How best to navigate them?Go for bespoke, not off-the-shelf: not all issues impact each company in the same way. Executives need to continually unlock and assess the impact of challenges and the possibility of opportunities for their business portfolio. Be prepared to recast long-held assumptions and follow a tailor-made path to future growth.Keep options open: scenario planning and threat analysis enable business leaders to better highlight risks to current operations. Understanding their own ecosystem, their competitors ecosystems and the likely path of innovation will help companies make smart choices about what and when to buy and sell to create the portfolio fit for the future.Buy for tomorrow today: the talent and technology that underpinned growth yesterday is not necessarily best suited to unlock growth tomorrow. With a shortage of technical and digital capabilities, executives need to continually reinvent their talent and technology strategies. In many cases, acquiring will be the fastest way to secure these in-demand assets.Executives are also navigating new societal rules for corporations. Creating long-term value beneficial to all stakeholder groups is becoming non-negotiable. Companies must be good corporate citizens, delivering value for all stakeholders. Those that find themselves on the wrong side of this argument will find themselves on the wrong side of history. They will lose customers and imperil future growth.As ever, senior executives walk a fine line. But by understanding how prevailing uncertainties impact their business, building optionality into their strategy and buying the next wave of capabilities, they can plot a course to create long-term value for their company, stakeholders and society more broadly.Steve KrouskosEY Global Vice Chair Transaction Advisory ServicesSee page 16 for the key takeaways that help define M&A success in todays deal economy.What is your perspective on growth today?Q72+56+64+18+42+33+9+2+3GlobalGrowing76%85%79%Stable12%14%19%Declining12%1%2%Oct 19 Oct 18 Oct 17Local73%67%59%16%31%35%11%2%6%Sector72%56%64%18%42%33%10%2%3%In the next 12 months16%In 2021 20%In 202210%46%Yes54%No54+46+N45+34+212 | Global Capital Confidence BarometerThe global economy is showing resilience in the face of elevated geopolitical, trade and tariff concerns Macroeconomic and external environmentSlowing economic growth does not imply a recession. The global economy is softening and desynchronizing, but respondents still expect growth. Global economic activity has slowed in some of the major economies in 2019. But most major economies are still growing.Challenges arise from tariff and trade concerns and uncertainties over geopolitics and national politics. These risks are putting downside pressures on export-oriented countries and those with divided domestic agendas. However, economies that rely predominantly on services and consumer spending are being supported by elevated levels of employment, strong wage growth and a benign inflation environment.The likelihood of a recession in the near term is not considered a significant threat by respondents. While there has been more speculation about the potential of a global correction, executives do not see this on the immediate horizon. A majority does not expect a severe downturn, and of the minority that do, say it is not likely until 2021 or 2022panies should be taking advantage of todays conditions to reassess their portfolio vulnerabilities and divest assets that are not part of their future growth strategy.QAre you expecting a significant economic downturn in the near to mid term, and, if so, when do you expect it to happen?Corporate earningsPositive55%80%74%Stable34%19%25%Negative11%1%1%Oct 19 Oct 18 Oct 17Short-term market stability59%68%52%30%30%43%11%2%5%Credit availability55%77%53%35%21%43%10%2%4%Equity valuations/ stock market outlook52%78%51%39%20%43%9%2%6%QPlease indicate your level of confidence at a global level in the following:QBased on your current performance, how do you expect the following financial metrics to change over the next 12 months?Sales/revenue 8% 61% 26% 5%Profit margin 9% 56% 30% 5%Employee costs 9% 40% 42% 9%Other input costs 12% 36% 42% 10%R&D/capex 12% 41% 38% 9%Free cash flow from existing operations6% 42% 45% 7%55+80+74+34+19+25+11+1+1Strongly increasedModestly increasedStayed the sameModestly declinedGlobal Capital Confidence Barometer | 3Macroeconomic and external environmentCapital markets steady in the face of headwindsAll asset classes have had a roller coaster ride in 2019, but equity and credit markets are benefiting from renewed central bank support.The past 12 months have been volatile for markets, but a reversal of policy direction, by both the US Federal Reserve (the Fed) and the European Central Bank (ECB) have calmed investors, for now.Uncertainty about market direction and the difficulty of exiting an easing cycle has softened the levels of positivity seen in the 2018 Barometer. But most respondents are positive in their outlook for the next 12 months.However, market shocks and reversals can be unpredictable and happen at any moment for example, recent tensions in the US repo market and the spike in oil prices following the drone attacks in Saudi Arabiapanies could utilize the current environment of ultra low, even negative, interest rates to optimize their capital structure to safeguard against potential threats.Corporate financial performance metrics to remain positive in the near term.The mildly positive outlook for the next 12 months is supported by respondents confidence in a modest improvement across a range of financial metrics. Revenue is forecast to be more positive than earnings. This is a clear indication that the margin pressures seen in reporting through 2019 will likely continue. But the overall picture is one of positivity. Respondents predict an uptick in free cash flow generation and investment in R&D and capex.Geopolitical, trade and tariff uncertaintyQWhat do you believe to be the greatest external risk(s) to the growth of your business?Slowing economyNew environmental or climate-change-related policies or rulesRegulatory uncertaintyIncreasing competition from startups and technology 22%19%14%14%31%Reconfigure our supply chain13%Reducing outsourcing11%Move our own production facilities into/out of certain countries11%Move offices and management into/out of certain countries11%Passing on higher production costs to customers9%Delaying plans to expand into new countries9%64%Yes22%We are monitoring and waiting for more clarity14%No64+22+14+NQAre you actively planning to respond to ongoing geopolitical, trade or tariff uncertainty? If so, how are you planning to do this?13+11+11+11+9+94 | Global Capital Confidence BarometerResponding to growth challenges Geopolitical, trade and tariff concerns, and technology disruption weigh heavily on the C-suiteA number of external threats to growth exist across a range of time horizons.It is impossible to avoid the headlines about geopolitical and trade disputes as well as regulatory changes.As equally immediate and pressing is increasing competition from innovative startups built on new technologies. Executives are acutely aware that a new business model or route to market can quickly undermine their competitive strengths and positioning. Proactively scanning an evolving industry landscape is a prerequisite for todays companies. Acquiring or co-opting these emerging challengers is often a necessary response.Broader societal issues are also increasingly impacting boardroom strategies. For example, the demand for action on climate change is not new and is growing stronger. Companies need to be proactive in addressing these issues or they will find customers shifting to competitors who are perceived to be more in tune to their concerns.Building optionality and resilience into supply chains and operations is the response to trade and tariff uncertainties.The challenges of changing trade and tariff rules are being proactively addressed by nearly two-thirds of respondents. Reconfiguring supply chains and other business operations is becoming business as usual. But as we have seen over the past year, new disputes and uncertainties can arise at any time, and often with severe impacts on supplier relationships and access to marketspanies should be examining all aspects of their operations through a lens of scenario and threat analysis. They should identify potential vulnerabilities and build the optionality that will enable them to pivot as required.Internal barriersShortage of talent or skills required Slowing demandQWhich of the following is the most significant challenge to your own companys growth plans?Increasing competition from existing competitorsDisruption from technology companies and startupsIncreasing costs and margin compressions14%13%10%24%14%QAre you having any difficulties hiring or retaining staff?Talent with specific technical skills relevant to our core business23%Digital/technology specialists16%Staff at all levels13%At board/management level9%61%Yes39%No61+39+N25%Responding to growth challenges23+16+13+9Global Capital Confidence Barometer | 5Margin compression is the biggest factor constraining growth intentionsThe battle for talent is another big growth challengeThe low inflation environment does not extend to input costs, squeezing profitability.When looking at their own immediate growth plans, executives are trapped in a confluence of interrelated challenges. Increasing input costs are hard to pass onto customers in a low inflation environment, especially with technology companies and startups waiting in the wings to capture market share.In response, companies have to constantly reassess their operating models as well as drive continuous improvement around indirect costs.But traditional barriers inside an enterprise are also a threat. Internal inertia, combined with a shortage of the talent and skills required, may leave some companies vulnerable and unable to respond proactively to these threats.Tight labor markets are adding more pressure to talent search.The much-mooted threat to jobs from technology is not playing out as many had predicted. Indeed, as more jobs are automated in routine tasks, companies are finding it more difficult to attract and retain talent with the right technical and digital skills to benefit from these efficiencies.Many are reskilling their existing workforce to better respond to technology changes as a result. A move to a culture of lifelong learning at companies may also help respond to these challenges as they morph in the future. But this can be a difficult transformation, and contingent workers may be needed to accelerate the process.Reducing barriers to entry/new players entering market22%Changes in customer behaviors/preferences22%Increasing competitive pressures*21%Blurring boundaries with other industries19%Increasing barriers to entry*16%* Increasing competitive pressures (e.g., lowering costs/pricing, product development, capital investment)* Increasing barriers to entry (e.g., due to capital requirements, rapidly changing profit models)6 | Global Capital Confidence BarometerSpotlightThe tech effectWhats the biggest impact of digital transformation on your company or industry?QCompetition and customers at the forefront of the corporate digital raceTechnology is both an enabler and a threat.As the underpinning enabler of their transformation strategy, technology has been the big lever for most, if not all, companies. But with todays unprecedented waves of technological innovation, companies are becoming increasingly pressured by competition on multiple fronts.And the ultimate prize they are battling over is the customer. Empowered customers in todays markets are setting the agenda for technology investment as executives adapt to meet ever-changing demands.Barriers to entry are changing across many industries. Companies need to understand the ecosystem of their industry landscape in order to determine their best route forward. They may need to partner with others in order to offset these threats.Technology has lowered initial barriers to entry for many upstart businesses. However, after reaching a certain point of maturity when brand, talent and geographical footprint become more significant drivers there are barriers that still exist.22+22+21+19+1625%In-house development/R&D18%Via an internal corporate venture capital fund1%We are not/have no plans to invest in digital/technology assets18%JVs/alliances20%Direct investments/acquisitions18%Via an external venture fundAs percent of total investment capitalNone 1%0%-24% 36%25%-49% 55%50%-74% 8%75%-100% 0%Externallyfocused investmentGlobal Capital Confidence Barometer | 7What percentage of your annual investment capital is focused on digital/technology?QHow do you invest in digital/technology assets?The respondents were allowed to select multiple responses. Percentages are prorated to 100%.QInvesting tilts toward digital In-house technology investment is now a lower priority.The unrelenting pace of innovation in technology is chan