Davos - 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.
Fear of a major geopolitical disruption over the next 12
months has risen to 54%, up from 36% 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.
"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 US
company chairperson in Davos privately saying he had started converting all of his
company's cash in euros into dollars since the eurozone 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
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
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 analyse their
relationships and think about switching banks or spreading the risk by hiring
"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 $370bn last year, an increase of more than
$100bn 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 eurozone 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 eurozone 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
Eurasia's Peterson said the group had been growing at about
20% a year. It employs scholars, former policy makers, former regulators and
industry experts to gather intelligence and analyse geopolitical trends for
Some, including Oxford Analytica, also use senior people with
experience in diplomacy, intelligence and finance to put together advice for
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.