Ben Hirschler Davos, Switzerland
BUSINESS leaders at the World Economic Forum have plenty to worry about, from the euro zone to global geopolitical upheavals, but at heart their problem is simple: how to find new revenue in a low-growth world.
Half a decade on from the global financial crisis, investors want to see earnings driven by more than just cost cutting. Their focus now is on a return to sales growth, which presents the world’s largest corporations with a $5 trillion (R44 trillion) challenge.
That is the amount of extra revenue the 1 200 top global companies need to find each year simply to meet analysts’ expectations, according to consulting firm Accenture.
“The trouble is that stock markets’ expectations of the ability of companies to grow far exceeds the underlying macroeconomic growth rates,” Mark Spelman, Accenture’s global head of strategy, said.
“So companies need to get beyond just thinking about emerging markets and rising middle classes and start to look at those segments where you are seeing significant consumer change, because there is a lot of latent growth in those segments.”
Increasingly, companies are seeking specific pockets of opportunity for sales growth.
The annual PwC survey of more than 1 300 chief executives worldwide found only 36 percent were “very confident” of their companies’ prospects for revenue growth in the next 12 months, down from 40 percent a year ago.
The mismatch between the sputtering global market for goods and services predicted by macroeconomists and the lofty numbers forecast by analysts who follow individual companies is striking.
In all regions, analysts’ forecasts for company revenue growth are well above the prevailing views on underlying economies.
While the World Bank last week cut its 2013 global growth forecast to 2.4 percent – and just 1.3 percent in advanced economies – analysts see company revenues expanding by 7.8 percent in Asia excluding Japan, 3.8 percent in the US and 2.4 percent in the euro zone, according to Thomson Reuters data.
And consensus forecasts call for 2014 sales to pick up even further, especially in the US, where a recovery, it is hoped, could be spurred by rapid growth in shale oil and gas supplies.
Companies in the middle of the current hoped-for recovery are wary, as reflected in results from two of Europe’s biggest manufacturers yesterday.
Siemens warned that industrial demand was weakening, while Unilever said economic conditions were “tough”, but it had countered this by faster innovation in its products.
Mergers and acquisitions would be one way for corporations to buy growth – but chief executives remain reluctant to undertake large-scale deals, despite cheap credit and relatively low valuations.
In fact, the focus of chief executives on such deals is at the lowest level in six years, according to the PwC survey.
“Merger and acquisition activity is going to be very focused, very targeted and certainly nowhere near the levels that we saw over the past several years,” PwC International chairman Dennis Nally said.
The calamitous nature of some recent bold deals, such as those of mining firm Rio Tinto, whose chief executive was sacked last week, will do nothing to encourage boldness by other business leaders.
Geography remains a vital lever for managers to pull as they chase new sales. For Spanish firms struggling with a dire home market, Latin America has become a prime target because of their language advantage, helping the likes of telecoms giant Telefonica.
With $5 trillion to find, business leaders can afford to leave no stone unturned. – Reuters