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EY Survey: Half of the business leaders expects a ‘U’ shape economic recovery
Business leaders are focussing on navigating the immediate impact that COVID-19 has across supply chains, revenue and profitability, while reconfiguring capital allocation and M&A plans for the post-crisis world, according to the 22nd Edition of the EY Global Capital Confidence Barometer (CCB22).
Almost three-quarters (73 percent) of respondents to CCB22, a survey of more than 2,900 C-Suite executives globally, expect COVID-19 to have a severe impact on the global economy in the form of supply chain disruption, as well as declining consumption. At the same time, executives are reviewing their operating models in response to the crisis. The increasing shutdown of activity in many parts of the world has exposed vulnerabilities in many companies’ supply chains, with over half (52 percent) taking steps to change their current set up and 41 percent investing in accelerating automation.
With just under half of global business leaders (49 percent) reporting profit margins that are either the same or lower than two years ago even before the current crisis, the vast majority of companies (95 percent) are bracing for further downward pressures on margins as the global economy slows.
“The human cost is the most tragic aspect of this crisis not only in terms of the lives lost, but also the number of livelihoods at risk. As business leaders respond with urgency to the unprecedented impact that COVID-19 is having globally, workforce welfare and job preservation will be at the top of their minds. There is no playbook for this situation and the C-Suite is reconfiguring and readjusting its response in real-time as events evolve rapidly. COVID-19 has created new vulnerabilities and unforeseen challenges. For most companies, the full impact on revenue and profitability across value chains are still highly uncertain,” said Steve Krouskos, EY Global Vice Chair Transaction Advisory Services.
“COVID 19 crisis will have quite a disruptive impact on the short term on local market. Q2 will be on “surviving” mode for the most part of the business. A reduced demand corroborated with supply chain disruptions will put a strong pressure on the cash part of the balance sheet. Despite the liquidity injected into the financial system, many small and medium companies are expected to face difficulties to access financing resources. We perceive a flat summer for gauging the crises impact and settling the new strategy followed by a resume of activity in the autumn and a rebound in 2021. In the short term, companies will focus on access to liquidity sources from government and private sources to ensure the crisis has a minimal impact.,” said Florin Vasilica, EY Romania Transaction Advisory Services Leader.
From a strategic point of view, on a longer period COVID 19 crisis will change much of the way we do business today. Supply chains based on anchor suppliers located in a single country (e.g. China) will be rethought. The risks of shut down supply and the whole business are too high to compensate lower costs initially perceived. Technology will see a major boost not just for communications but also for putting in place more agile, flexible and resilient company processes. Human capital remains the most affected part of this pandemic and we count on the business and political leaders to work together on preserving the health and financial stability of the people.
In terms of M&A activity, even if the majority of project have been put on hold, opportunities will continue to rise in medium term. Some of the companies will recalibrate their portfolios and it is possible to assist to non-core line of business to be sold at a discount.
Preparing for what comes next
Many companies (72 percent) already had major transformation initiatives underway, triggered as a result of pressure on revenue targets and to meet profitability goals, according to CCB respondents.
The majority (72 percent) are also planning to conduct more regular strategy and portfolio reviews once some normality has returned, executives say that they will focus on prioritizing changes in new investments in digital and technology (43 percent) and capital allocation across their portfolio (42 percent).
Post-crisis recovery points to transformation through M&A
Despite boardrooms focusing on an unprecedented global health emergency, executives are also planning their future beyond the crisis. While 54 percent of respondents expect a ‘U’ shaped recovery period of slower economic activity extending into 2021, 38 percent see a ‘V’ shaped recovery and a return to normal economic activity in Q3 this year. Just 8 percent foresee an ‘L’ shape recovery – a sustained recession period until economic activity returns in 2022.
With the majority of companies assuming a recovery in the medium-term, the intention to actively pursue M&A in the next 12 months remains at the elevated levels (56 percent) seen throughout this current deal cycle. As a result of COVID-19, global executives say they will focus more on a target’s business resilience when evaluating a transaction (38 percent) and are prepared to see valuations come down (39 percent).