A tumultuous 12 months that saw revolutions in the Middle East, a worsening debt crisis in Europe and a tsunami in Japan has set the tone for corporate activity in 2012.
Caution, flexibility, nimbleness and deep knowledge of host countries are more important than ever, executives and their advisers said at the World Economic Forum’s annual meeting in Davos, Switzerland.
Fear of a major geopolitical disruption over the next 12 months has risen to 54 percent, up from 36 percent last quarter, a WEF poll showed at the start of this week’s meeting.
“You have to more than at any time in recent memory think in terms of ‘what ifs,'” said Vasant Prabhu, chief financial officer of Starwood Hotels & Resorts Worldwide Inc.
“This is a world in which you have to think in terms of scenarios and alternate outcomes and what you would do.”
Companies are closely looking at their counterparties – their vendors, suppliers and the banks that manage their cash to assess what would happen if they run into problems.
They are worrying about their currency exposure, with one U.S. company chairman in Davos privately saying he had started converting all of his company’s cash in euros into dollars since the euro zone debt crisis suddenly deepened last year.
Other risk-averse moves include companies adjusting their supply chains to build flexibility into their business should a natural disaster cause a repeat of the huge disruption which followed the Japanese earthquake and tsunami last year.
And as they enter new markets and face more uncertainty in mature ones, they are putting more effort into understanding local politics and business practices. Some are using former spies to gather intelligence on trade partners.
Behind all this is a growing sense that increased uncertainty is the new reality of doing business. Financial considerations can no longer be the sole focus, advisers and executives said in interviews before and during the WEF in Davos.
“I think fundamentally there is an acknowledgement that this volatility that we are seeing is going to be here for the foreseeable future,” PricewaterhouseCoopers Chairman Dennis Nally said.
“You can’t predict the solution here in Europe. You can’t predict what may happen in the Middle East. You can’t predict what could happen in terms of the geopolitical issues in Asia, or certainly what’s coming out of Washington,” Nally said.
Companies feel an imperative to be better prepared.
“Our own view right now for 2012 is, ‘Yes, there are some scenarios that could be bad but we think of them as low probability,” Starwood’s Prabhu said. “We think 2012 would be a year where the world muddles through.”
FLIGHT TO QUALITY
For bankers one consequence is closer scrutiny of the financial health of their business by corporate treasury departments. Ratings downgrades of some banks have prompted corporate treasurers to analyze their relationships and think about switching banks or spreading the risk by hiring more.
“Increasingly, we are seeing clients take a holistic view of integrating strategic capital raising and risk and cash management in this unique time of uncertainty and volatility,” said Jacques Brand, global co-head of Investment Banking Coverage and Advisory at Deutsche Bank.
“As a result, clients are planning accordingly and we are seeing a flight to quality.”
Indeed, several major banks have seen their deposits grow, in part because companies have moved their business away from weaker institutions. JPMorgan Chase & Co.’s Treasury & Securities Services unit saw liability balances grow to $370 billion last year, an increase of more than $100 billion in one year, Mike Cavanagh, the division’s chief executive said.
“Corporate clients that we talk to are very mindful that they have counterparty and currency risks, and prioritizing them more so than pre-crisis,” Cavanagh said.
“To the extent a client has a portfolio of banks providing transaction banking services, they are becoming much more conscious of concentration risk,” he added.
Bankers said they are also advising clients to look beyond their immediate trade partners, as what happens to the partners’ counterparties could end up affecting their business as well.
“You have to think in terms of two or three degrees of separation. Your vendor, and your vendor’s vendor — when does that create a problem in your supply chain? Your banker and your banker’s banker — when does that create a problem in your financials?” said Samuel Di Piazza, vice chairman in Citigroup’s Institutional Clients Group.
“Finance departments have to deal with that this year,” Piazza said. “Two years ago they didn’t. Maybe in ’08 they did, but in ’10 we felt better about that. It’s back on the agenda.”
POLITICS OF BUSINESS
For many Western corporations, the euro zone crisis and the gridlock in Washington are also bringing home the fact that politics has an ever bigger role to play in business and markets.
“The euro zone crisis on the surface is a fiscal crisis or a debt crisis but it’s going to be resolved as a political issue,” said D.J. Peterson, director of Corporate Advisory Services practice at political risk research and consulting firm Eurasia Group.
Adding to the complexity is the need for companies to find growth in emerging markets, where traditionally the state has played a bigger role in the functioning of markets.
Boutique firms such as Eurasia Group, Oxford Analytica and others, which provide geopolitical advice and analysis, are seeing demand for their services grow rapidly in the last few years and are increasingly finding a role alongside traditional advisers such as investment bankers and lawyers in transactions.
Eurasia’s Peterson said the group had been growing at about 20 percent a year. It employs scholars, former policy makers, former regulators and industry experts to gather intelligence and analyze geopolitical trends for clients.
Some, including Oxford Analytica, also use senior people with experience in diplomacy, intelligence and finance to put together advice for corporate clients.
Swiss insurer Zurich Financial Services said 2011 had been a rough year for natural catastrophe losses but its business of insuring against political risk is booming.
“From sovereign debt to tsunamis, the universe of enterprise risk seems broader and more consequential than ever before,” said Thomas Huerlimann, head of Zurich Global Corporate.
“You need to hedge your political risk to a greater degree than you had to do, certainly in the last 20 years,” said Nader Mousavizadeh, chief executive of Oxford Analytica.
(Additional reporting by Emma Thomasson and Ben Hirschler; editing by Janet McBride)
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