RBC Capital Markets survey: global executives concerned
about rising sovereign debt as competition for capital gets
more acute
LONDON, NEW YORK, TORONTO, June 28, 2010—
Rising sovereign debt in the developed world is one of the
main concerns for the world's business leaders and financial
executives, according to 440 senior executives who participated
in a survey commissioned by RBC Capital Markets,
the corporate and investment banking arm of Royal Bank of
Canada (RY on TSX and NYSE).
Among the key findings of the survey, conducted by the Economist
Intelligence Unit:
Sovereign default:
The debt problems facing eurozone nations have raised questions
about the monetary union's future in its current form. Almost
half of those surveyed agree that there is a greater than
50 per cent chance of one or more countries leaving the eurozone
in the next three years. More than one-third (36 per cent)
see at least a 25 per cent chance of a complete breakup of
the eurozone over the same period.
Out of those who see a significant chance of the eurozone
losing a member in the next three years, Greece is considered
the country most likely to leave the eurozone, followed by
Portugal, Spain and Ireland. Germany is perceived as the fifth-most
likely country to leave the eurozone, possibly reflecting
the respondents' concern that the German government may lose
confidence in the monetary union if the current crisis continues1
.
While the prospects of a G20 economy defaulting on its debt
remain relatively low, almost one-third of the respondents
place the odds of this occurring at 50 per cent or more, indicating
a rising concern that the debt problems facing the global
economy may spill outside the eurozone.
Among those who foresee a significant chance of a G20 default,
Italy received the most votes, followed by Argentina, Turkey,
Mexico and Russia. The United Kingdom is perceived to be the
Western European country, after Italy, most likely to default
on its debt, both within the G8 and the G20.2
Outlook for currencies:
Two-thirds of executives (67 per cent) believe the value
of the euro will continue to slide over the next 12 months.
Concerns about the euro's weakness have reinforced the position
of the dollar as the reserve currency of the near future,
although its power is perceived to be in decline. Eighty per
cent of the respondents believe the dollar will remain the
dominant reserve currency in three years' time, with the consensus
dropping to 57 per cent over a five-year period. This picture
likely says more about the lack of real alternatives, rather
than confidence in the dollar, and is further illustrated
by the fact that more respondents (15 per cent) see the Chinese
renminbi as the reserve currency of choice within five years
rather than the euro (12 per cent), despite the low likelihood
of this occurring.
Although the dollar is expected to remain the world's reserve
currency for the near future, 40 per cent of respondents believe
that over the next three years the currencies of exporting
countries, such as the Persian Gulf States, Taiwan and Hong
Kong, will stop being pegged or managed closely against the
dollar. The recent action by the Chinese government which
led to the removal of renminbi's unofficial peg to the dollar
further strengthens this expectation.
Emerging and developed economies:
Survey respondents see an increased divergence between emerging
and developed economies. Eighty-seven per cent of the respondents
expect growth in the developed nations to be positive, albeit
modest and remaining below historic norms. Respondents have
a positive outlook for industrialized Asia, followed by North
America, while there is a strong consensus that Europe's prospects
are negative.
The respondents predict an increasing growth imbalance between
Europe and the rest of the world, even as U.S. economic influence
is seen to be waning, with over two-thirds of the respondents
(66 per cent) in agreement. There is also a growing consensus
(56 per cent) that emerging markets such as China, Brazil
and India will replace the U.S. as a source of demand driving
global growth.
Fifty-nine per cent of corporate and financial executives
believe that the governments of developed countries will not
have the firepower to raise the credit needed to jump start
their economies in the event of another financial crisis.
A similar number agree that the credit capacity of developed
economies will diminish compared with today (58 per cent).
Nearly two-thirds of the executives surveyed (64 per cent)
agreed that developed countries will not stop increasing their
levels of indebtedness until investors force them to do so
by scaling back on debt purchases. Thirty-nine per cent of
executives say that corporate bonds from the most creditworthy
companies will come to yield less than their sovereign benchmarks.
In spite of these concerns, just 41 per cent have adjusted
their portfolio strategy in response to changes in sovereign
risk.3
Inflation vs. Deflation:
Asked what they fear more, inflation or deflation, the majority
of the survey respondents expect inflation to pose a greater
threat than deflation to their financing and budgeting decisions.
This finding reveals a shift in perception from a previous
RBC Capital Markets survey conducted in the third quarter
of 2009, in which executives from the same demographic were
evenly split between inflation and deflation when asked a
similar question.
Competition for Capital:
Demand for funding is low today, with just 38 per cent of
corporate respondents expecting to raise fresh capital in
the next two years. However, the competition for capital may
well grow more acute as heavily-indebted governments seek
to raise unprecedented amounts of capital for structural outlays
related to aging populations, deteriorating infrastructure
and possible energy and climate crises.
This new level of scrutiny will bring about a new era of
competition for capital. Investment-grade borrowers, both
corporate and sovereign, can choose their investors and almost
name their price. Nevertheless, over the next few years there
will be stiff competition for increasingly scarce capital.
With banks looking to rebuild balance sheets in a more stringent
regulatory environment, sovereigns seeking to restore public
finances to health, and corporates looking to finance - at
the very least - day-to-day needs, this competition presents
a highly challenging overall environment for raising capital.
Commenting on the findings, Marc Harris, co-head, Global
Research, RBC Capital Markets, said: "Competition
for capital will no doubt become more acute for corporates
and sovereigns and the next few years will continue to present
a challenging environment. While there is an obvious consensus
that not all sovereign bonds are created equal, our survey
results imply that investor appetite for specific sovereign
debt will be closely correlated with each country's ability
to bring fiscal discipline in fighting the spectre of inflation."
Richard E. Talbot, co-head, Global Research, RBC Capital
Markets, said: "Rising government debt in the developed
world, and the re-balancing of power between developed and
developing nations, poses questions over the outlook for currencies.
The downside of growing sovereign debt and pressure on currencies
such as the euro is clear. However, it is the dynamic of the
relationship between the world's creditors and the world's
debtors and their currencies that will ultimately determine
the competition for and the cost of capital in the new era."
Video - Richard Talbot, co-head, Global Research, RBC Capital
Markets, RBC Capital Markets - Highlights
from the survey and white paper "The New Normal":
Implications of Sovereign Debt and the Competition for Capital
Harry Samuel, global co-head of Fixed Income & Currencies,
RBC Capital Markets, added: "The relative volatility
in the currency markets is strongly correlated with the derailing
effect of sovereign risk that we are witnessing across the
globe, albeit in different degrees. Investors will therefore
continue to avoid investing in currencies of countries with
unsustainably high levels of debt, while favouring currencies
of countries with sound public finances. As the question over
the long-term preeminence of the dollar remains widely open
in this zero sum game, we expect a broadening of interest
in a wider range of currencies, including commodity linked
FX trades."
Additional findings from the survey:
- Divergent outlooks - Corporates vs. Financials:
Financial firms tend to be more optimistic than their corporate
counterparts about transaction volumes in their country
over the coming year. For example, 49 per cent of financial
firms expect that IPO levels will be higher, compared to
38 per cent of corporate respondents. Financial services
executives also expect higher levels of activity than their
corporate counterparts for secondary equity offerings (53
per cent vs. 27 per cent); M&A (61 per cent vs. 52 per
cent) and investment-grade debt (46 per cent vs. 31 per
cent).
Asset classes: More respondents said that risks were
higher this year for every single asset class, with currencies,
commercial real estate, equities and corporate debt showing
the greatest relative increases in perceived risk. In fact,
currencies and equities were perceived to have become even
riskier than sovereign debt. Notably, a significant minority
said that certain asset classes had become less risky, including
such classic inflation hedges as real estate and commodities.4
- Cash is king? While investors once frowned on companies
hoarding cash, many now recognize the benefits of significant
cash reserves. In evaluating investments, the criteria that
financial executives most often say they value more than
they did two years ago are a company's financial strength
(59 per cent), its ability to maintain adequate levels of
cash or other sources of liquidity (49 per cent) and its
ability to mitigate the risks of extreme market conditions
(49 per cent). All three criteria imply the desirability
of a war chest to withstand financial crises.
About the survey
RBC Capital Markets commissioned the Economist Intelligence
Unit to survey 440 senior executives from around the globe
(North America (34 per cent), Europe (41 per cent), Asia Pacific
(16 per cent) and Rest of the World (nine per cent), including
both clients and non-clients of the firm, on their outlook
for the future of capital markets. The survey was conducted
between April 28-May 25, 2010. The respondents included 229
senior executives from commercial and investment banks, hedge
funds and private equity firms and 211 executives from non-financial
companies active in the capital markets.
About RBC Capital Markets
RBC Capital Markets is the corporate and investment banking
arm of the Royal Bank of Canada and is active globally in
debt and equity origination, sales and trading, foreign exchange,
infrastructure finance, and structured products across a number
of industry sectors. Its North American platform includes
a significant U.S. investment banking franchise and leading
equity and fixed income underwriting, sales, trading and research
businesses.
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RBC Contacts:
Beverley Weber,
+44 (0)20 7029 7685, Beverley.Weber@rbc.com
Kevin Foster,
+1 (212) 428-6902, Kevin.Foster@rbccm.com
1Survey respondents were asked to choose the probability
that one or more countries would withdraw from the eurozone
over the next three years. The 76 per cent who said that probability
was 20 per cent or more received a follow-up question: Which
country or countries were most likely to leave, with respondents
permitted to choose up to three countries.
2Survey respondents were asked: What probability would you
assign to a sovereign debt default from a G20 country over
the next three years? The 68 per cent that chose a probability
of 20 per cent or more were asked to select the G20 countries
most likely to default during this period, with respondents
allowed to choose up to four countries.
3The final data point relates to a question asked of financial services executives only.
4All data in this bullet relates to a question asked of financial
services executives only.
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