Carmine Di Sibio, EY's Global Managing Partner – Client Service and member of the Global Executive, is bullish on Italy and on the EuroMed. In spite of political tail risks, Europe is not considered a negative “hot spot” in the world: Korea, Turkey, Middle East are worst off. The euro is not breaking up: on the contrary, Brexit and the Trump administration will be unifying factors. M&A is picking up in the EuroMed area (made of 28 countries) and Europe is resilient to shocks, for the moment.
BUFACCHI: Your BaroMed 2017 report on the Attractiveness of the Mediterranean, Middle East and Gulf region for foreign investment (a barometer for FDI across the “Euromed region” made of 28 countries) FDI “still shows a picture of resilience”. Where do you think this resilience stems from?
DI SIBIO: In the last few years, Europe has proven to be resilient. You would expect more volatility and disruption due to Brexit and the political instability brought about by elections this year, but in spite of this all, Europe is resilient. This does not mean that overtime there would be more pressure and this resilience might dry off. But for the moment, a survey amongst our global clients shows that confidence in Europe has increased from 36% a few months ago to 57% more recently. FDI is going to continue to be ok in Europe as long as the uncertainties don't impact on business.
BUFACCHI: Do you think that Brexit will divide or will it unify Europe?
DI SIBIO: I believe that Brexit will be a unifying factor in Europe. When Brexit happens, it will take the shape of trading agreements between the UK and a more United Europe.
BUFACCHI: Will it be a hard Brexit or a soft Brexit, in your opinion?
DI SIBIO: I believe that it will start as hard positioning and it will end up into soft deals. It will be interesting as Brexit takes place at the same time as the new policies by the Trump administration, so negotiations will take place between the UK negotiating with the US and Europe, and Europe negotiating with US and UK and the UK negotiating with Europe and the UK. They will all tend to do the same things.
BUFACCHI: Do you think that Trump wants to break up the euro area?
DI SIBIO: No, I do not think so.
BUFACCHI: Angela Merkel has recently mentioned once again a two-speed Europe, without giving any details. How do you think the business community would react to the creation of a two-speed Europe?
DI SIBIO: I do not understand what two-speed really means. Does it mean that Germany is on one side and the rest on the other side? Or that Germany makes a group together with France and other countries? How would a foreign company differentiate one speed from the other? On what grounds? What rules? I do not see it coming: and I don't believe Europe can split into two speeds: it is either a united Europe, or Europe will break up. And I do not think it will break up, it will stay intact.
BUFACCHI: Nevertheless Europe is getting worried about the break-up tail risk back on the table. Is it a real risk?
DI SIBIO: I do not rank Europe, or Europe's political problems and the 2017 European elections, as one of the hottest spots in the world. I am more preoccupied by Turkey, Korea, the Middle East, some South American countries: those are real hot spots.
BUFACCHI: Italy is one of the 28 countries that make up the EuroMed area in your BaroMed report: it looks as if Italy is attracting FDI too. Do you think that Italy has more homework to do at home in order to attract more foreign direct investments?
DI SIBIO: EY is bullish on Italy as it is bullish on the EuroMed area. We think that Italy is very well positioned geographically as it is in the middle of South Europe, North Africa and the Middle East. And Italy is a very well liked country, especially in the US: it is so because of its culture, its exports, its tourism. Everyone loves to do business in Italy and in the US, we have very strong ties with Italy. For this reason, I do feel that Italy has to do more to facilitate foreign businesses and entrepreneurs. Italy still has to do more work at home in the sense that it must make it easier for FDI to do business in Italy and this means cutting bureaucracy. There are many US private equity firms that are coming to invest in Italy and in high tech companies just because Italian banks are mainly commercial banks and Italy lacks a proper private equity market.
BUFACCHI: Italy has a high corporate tax too: do you think that to become more market-friendly Italy should lower corporate taxes?
DI SIBIO: Yes, high corporate taxes do keep business and FDI away. I think that the tax issue will be a worldwide topic in the next 2-3 years. The US will cause a lot of change around the world. It all will depend on what the Trump administration will do exactly. It wants to fund the corporate and household tax cuts with higher border taxes: easier said than done.
BUFACCHI: What about Trump's protectionism? Any spill over effect on Europe? On Italy?
DI SIBIO: I think that globalization is here to stay, there is no way back. Business in general is global and it will become more global. As we say, the “genie is out of the bottle” meaning that once governments and regimes let globalization out of the bottle, it cannot get back into it. Thanks to technology, globalization cannot be stopped: just to give you an idea, the telephone took 75 years to spread around the world, now innovation takes a few days to become global.
BUFACCHI: In your BaroMed report you underline a recent trend, FDI moving from greenfield into M&A. Why?
DI SIBIO: Companies all over the world feel the same pressure: they must grow, they should become bigger in size. Volumes, sizes are more important now. This pressure is felt in the US, in the Uk, in China. Companies can grow in two ways: organic and inorganic. The ones that choose the organic way, they grow from within, they invest in developing new products, hiring specialized people and so on. The inorganic growth is driven by transactions: M&A is becoming the solution for companies that want technological growth in a quick way, so they acquire high tech companies. In EY we ourselves are doing acquisitions in the digital, cyber and analytics sectors, where multiples are higher.
BUFACCHI: What is the difference between organic and inorganic growth?
DI SIBIO: The benefits from inorganic growth can come sooner, at a faster pace compared to organic growth which is slower.
BUFACCHI: But: M&A requires a lot of cash: is there enough cash around?
DI SIBIO: There is a lot of cash in the balance sheet of companies. And this should not be mixed up with the excess liquidity in the financial markets. We see a lot of unutilized cash in technology companies. Cash in a corporate balance sheet is cash not given to shareholders and available to be reinvested: many major corporations are getting into private equity for this reason, to invest their extra cash.
BUFACCHI:Why has so much cash piled up in the balance sheet of companies. Why have they not been investing?
DI SIBIO: The problem is uncertainty in the future: this keeps companies on hold, they do not invest. Look at some emerging markets: their growth has underperformed compared to expectations. China is one of them, growing now at about 6%. The risk-reward is not what it used to be, it is lower than expected so companies are on hold. But I would still argue that FDI has been resilient to recent shocks. So it is doing relatively ok in the EuroMed area, especially in Europe. Of course, if things were to turn for the worst, cash would be ready to move back into other areas, such as Africa, India, Latin America.
BUFACCHI: There are great expectations on M&A picking up in the European banking sector. Europe is overbanked, it needs to have fewer and bigger banks. Yet, it is not happening. Why?
DI SIBIO: M&A in the European banking sector is held back by over-regulation, stiff capital requirements, compliance. Too many rules. Banks are not free to use their capital for transactions. It is a buyer problem. On the top of this, another problem area is the size and the evaluation of the NPLs portfolios. There are no homogeneous ways to give value to a loan portfolio, most of all in the case of bad loans. This does not help M&A. But in due time there will be more acquirers able to make acquisitions in the European banking sector.
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