Asia has not been immune from the global macroeconomic headwinds that have built steadily over the course of 2022, and is now also experiencing rising inflation and interest rates and tightening monetary policy, albeit perhaps not to the level seen in the West.
Deal value and volume for 2022 was significantly down from the record peaks of 2021, returning to levels seen prior to the COVID-19 pandemic. The key question now is whether activity will stabilize at these levels, or fall even further as growth shrinks.
Despite following global trends generally, the vast and diverse markets of Asia do still have certain individual characteristics which mark them out as we consider the M&A outlook for 2023.
As always, when assessing the outlook for the region, we have to look first at China – by far the biggest economy in the region. Here, short term sentiment was, until recently, as negative as during the 2008 global financial crisis, although recent developments have begun to show some hope for a more positive outlook.
China's adherence to its strict zero-COVID policy has come at significant cost to the economy in the short term; the recent change to its policies and the lifting of restrictions on travel should help to alleviate this, however structural issues still remain. With COVID-19 cases continuing to rise and consequent disruption to global supply chains, COVID-19 will continue to impact China-focused M&A in 2023.
The trade war with the West, particularly the US, shows little sign of abating, although recent remarks by the new Chinese Foreign Minister indicate that a normalization of relations is being sought. Until such time, tensions continue to exist, most recently with the imposition of COVID tests by countries on inbound Chinese travelers (with threatened Chinese retaliation) and the US Government introducing a suite of sanctions cutting China off from certain semiconductors made anywhere in the world with US equipment and banning US persons from supporting the development of Chinese chips. Such tensions suggest that M&A in China may become more domestic in focus amid heightened protectionism and a desire to become more self-sufficient.
Furthermore, China's vast real estate sector has become over-leveraged in recent years and the country's largest developers have been defaulting on their sizeable debt loads. Following property giant Evergrande's missed debt repayment in December 2021, the fate of a number of peers appears to be in the balance as the crisis deepens. Similarly, since the 2008 global financial crisis, municipal governments in the country have been issuing bonds to bankroll infrastructure projects. This debt – around US$8 trillion – came close to default in October 2022. Whilst in all probability the central government will intervene to avert any systemically dangerous default or collapse of a major player, or even an entire industry, these examples serve to demonstrate the challenging position parts of the Chinese economy find themselves in and the difficulties that will need to be overcome.
Hong Kong has, in the past few months, plotted a less strict course out of its COVID restrictions than its mainland neighbor, prioritizing opening-up for international business ahead of reopening links to China. However, knock-on effects from re-opening (including resource and personnel constraints) and high interest rates together with significant emigration, will most likely dampen growth in 2023, extending a period of four very difficult years for the city.
South East Asia, particularly Indonesia and Vietnam, has continued to see rapid growth, helped by manufacturing capacity migrating from China as companies look to secure their supply chains. Previously, this was a consequence of increasingly restrictive and protectionist policymaking emanating from the West but was also until recently strengthened by China's zero-COVID policy.
The most notable beacon of optimism in the region is India, where growth per annum continues at nearly 7 percent. The IMF has forecast that India will have the fastest growth of any major economy this year. Whilst the Indian economy is expanding from a relatively low base, there is no doubt that India is now attracting international investment, which might previously have gone to China.
Despite the obvious challenges, there are still grounds for optimism as we head into 2023. Restructuring transactions are already on the rise and distressed M&A seems likely to follow. Conglomerates and financial institutions are under pressure to streamline their operations, distribute cash to shareholders, and sell off non-strategic assets to focus on core competencies, thus generating work for corporate and M&A professionals.
With energy transition likely to dominate board room discussions for years to come, investment in renewables and other green initiatives will be prioritized, and indeed incentivized by governments. Traditional fossil fuel multinationals are under intense pressure to refocus their business models, and M&A offers them a route to increase renewables assets in their portfolios, rather than embarking on lengthy capex projects to convert their existing processing facilities. The demand for healthcare and insurance, as well as pharma and biotech, generally is on a long-term upward trend across the region as the demographic shifts to an aging and more affluent population that requires long term medical care. If buyers are willing to meet still high valuations in these sectors, there are M&A deals to be done.
Private equity still has a huge amount of dry powder at its disposal. Whilst it may need to deploy more equity in deal structures due to costlier debt, pressure from investors to deploy committed capital will inevitably cause deal flow to continue, albeit at lower levels and a slower pace than before. In addition, private debt funds may come to the fore to fill funding gaps left by risk-averse banks, and we may see Australian superannuation funds joining Canadian and US pension funds in looking beyond their own borders to put their capital to work.
It is said that it is an ill wind that blows nobody any good. Whilst 2023 will unquestionably be a challenging year generally, opportunity awaits those with a clear strategic vision and ready access to capital.
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