EY: Capital strategies being rewritten as C-Suite grapples with immediate impact of new reality

• 73% of global executives expect COVID-19 to have a severe impact on the global economy
• Over half (52%) are having to reconfigure operations, as vulnerabilities in supply chains are exposed
• 54% of respondents expect a longer period of slower economic recovery extending into 2021
• M&A activity intentions remain strong as executives look beyond the crisis

Business leaders are focusing 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 22^nd Edition of the EY Global Capital Confidence Barometer (CCB22).

Almost three-quarters (73%) 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%) taking steps to change their current set up and 41% investing in accelerating automation.

With just under half of global business leaders (49%) 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%) are bracing for further downward pressures on margins as the global economy slows.

Preparing for what comes next

Many companies (72%) 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%) 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%) and capital allocation across their portfolio (42%).

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% of respondents expect a ‘U’ shaped recovery period of slower economic activity extending into 2021,38% see a ‘V’ shaped recovery and a return to normal economic activity in Q3 this year. Just 8% foresee an ‘L’ shaped 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%) 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%) and are prepared to see valuations come down (39%).

Stelios Demetriou, Partner and Head of Transaction Advisory Services of EY Cyprus says:“As business leaders respond to the unprecedented impact that COVID-19 is having globally, workforce welfare, job preservation and securing business continuity will be at the top of their minds. M&A plans are therefore put on hold, but only temporarily. M&As remain a powerful tool to reshape portfolios and accelerate companies’ transformation. Therefore, once the situation stabilizes, M&A plans are bound to move ahead, probably with added urgency.”