With a sinking feeling experts ponder 2012

US focus

It’s with a sinking feeling of uncertainty that US IROs must look back at the market turmoil of 2011 and ahead to 2012. They’re not alone.

‘The world looks very scary right now,’ pronounced the head of research of a major mutual fund group before a group of IROs during the fall. ‘Europe looks like a mess. And I don’t see a way out.’

All eyes will continue to be glued to the CBOE Volatility Index (VIX), or the ‘fear index’. Whenever it’s above 25 – the dividing line between a worried market and a sanguine one – the world of corporate finance, from IPOs and secondary listings to deal making, goes catatonic.

During the fall of 2011 it dipped very briefly below that line – when Europe passed a Greek bailout – but generally hovered above 30 and even went up to 45 in early October.

In August 2011, with the debt ceiling debate bringing Washington to the brink, the VIX hit 50 and stock market volume and turnover rocketed to the same levels of the 2008 financial crisis, the 2007 quant meltdown and even the May 2010 Flash Crash. And the debt struggles are not over in either Europe or the US.

Lobbyist view

‘Washington is as volatile as the markets are, and the markets are paying attention,’ says John Savercool, senior lobbyist and managing director at UBS Americas.

‘The dysfunction in Washington is driving a lot of angst, not only among voters but also among investors.’

Congress will continue to wrestle with deficit reduction, with its debt-cutting super-committee having failed by its late November deadline to slash $1.2 tn of debt, a figure still nowhere near the $4 tn some want to see lopped off the $15 tn national debt.

Taxes are a sticking point: as Savercool points out, the top 3 percent of Americans, making more than $200,000 a year, already pay more than 50 percent of all income taxes, and whether they should pay more drives the philosophical debate between Republicans and Democrats.

Meanwhile, investors will be focused on the Supreme Court’s decision on the constitutionality of the healthcare bill enacted in 2010, which is expected in late 2012.

That will be a contentious issue going into the federal elections in November, along with the expiration of Bush-era tax cuts for the wealthy.

In considering President Obama’s reelection prospects, Savercool advises studying the unemployment rate and the president’s approval ratings.

But as he looks back at the extraordinary events that shaped 2011, from the Arab Spring to natural disasters to the killings of Bin Laden and Gaddafi, Savercool points out that 2012 will bring new and unpredictable events that will determine how the president and Washington as a whole are assessed.

That makes the year ahead in politically sensitive and macro-driven capital markets no less immune to prognostication.

European view

Over in Europe, there is a similar sinking feeling. ‘The outlook is significantly more uncertain than it was this time last year, when there were hopes of a gradual recovery from recession,’ comments Michael Mitchell, general manager of the UK’s IR Society.

‘Now, the outlook, particularly on this side of the Atlantic, is completely obscured by the eurozone sovereign debt crisis.’

Indeed, what once seemed improbable ‒ that the eurozone could fall apart ‒ now feels like a distinct possibility.

It had been assumed Europe’s political leaders would do whatever was necessary to avoid catastrophe, but that is no longer taken for granted.

Even if disaster is averted, Europe looks set to endure a year of weak growth or even recession. Across the continent, business is being held back by austerity measures and shredded consumer confidence. Planned strike action will only add to the malaise.

Balance sheets 'not in bad shape'

For Mitchell, corporate UK itself is not in bad shape: balance sheets have been repaired since the financial crisis and companies with exposure to emerging markets or strategic resources are performing well.

‘But the threat of a double-dip recession, triggered by draconian debt reduction measures in Europe, does not augur well for recovery,’ he says.

‘From an IR perspective the need to be very clear in your communication to the market is going to be even more important. Investors will need to understand how your business is positioned relative to whatever economic outcome transpires.’

With credit once again becoming hard to attain, 2012 is set for a renewed focus on the balance sheet and financing options – it’s all very 2008.

‘I have already started hearing investors asking questions about upcoming refinancing issues at some of our clients,’ comments Anne Guimard, president of FINEO, a Paris-based IR consulting firm.

Amid the uncertainty, regular contact with investors will be more important than ever. But watch out if you’re planning a roadshow to London during the summer months: the Olympics are coming to London in 2012.

‘Hotels will be full and taxis unobtainable – so probably not a clever idea to arrange investor meetings in London in July and August,’ notes Mitchell.

The Asian story

DBS had already given up on the rest of the world in 2009. Piyush Gupta, the newly appointed CEO, refocused the Singaporean bank’s strategy on what the calls the ‘Asia story’.

The way he tells it, the Asian banking sector in China, India and South East Asia offers plenty of opportunities for growth, so why look elsewhere?

Gupta’s outlook for the economic strife ‘elsewhere’ is cautious without being catastrophic. ‘Our base case is that Europe and the US will be a bit like Japan: low and uneven growth of 1 percent or 2 percent a year,’ he predicts.

‘As a result, Asia will slow down by 1 or 2 percent but continue to grow.’

William Fung is the former CEO and current executive deputy chairman of Li & Fung. The Hong Kong-based supply chain manager for fashion retailers like Zara has operations in more than 40 global economies.

‘In the old days we controlled production from the developing parts of the world and we sold primarily to customers in the US, western Europe and Japan,’ Fung explains.

‘Now we are talking about selling globally as well as sourcing globally, so China is not only a market that we source from but also a market that we sell to.’

The task for 2012, therefore, will be to continue explaining the Chinese economy to jittery investors burned by the volatility in western markets.

China's lurking scare stories

The China story does not come free from lurking scare stories, however: take a walk around the shopping malls being built in Shanghai by regional property developers like CapitaLand, and the shops selling clothing made by Li & Fung, paid for by cash withdrawn from DBS ATMs, are often eerily empty of customers.

Outside on the street, real estate agents have taken to standing on the street to advertise available properties on cardboard placards to uninterested drivers stalled in heavy traffic.

These types of sleeper issues in the domestic economy are even keeping down the share price of China’s big four state-owned banks, in spite of record profits.

By contrast to current billing, the Chinese consumer may not be a big enough hero to save the entire world. Demand from China has yet to surpass the US or European buyer, confirms Fung.

Even for Asia-focused banks like DBS the Asian narrative makes reference to the potential European and US shocks lurking on the next page. ‘If the US and Europe fall off a cliff and it’s 1933-1935 again, all bets are off,’ says Gupta.