Mergers and acquisitions (M&A) in Asia-Pacific’s (Apac) finance sector are unlikely to recover soon as economic and geopolitical uncertainties, on top of higher financing costs, dampen dealmakers’ confidence, said S&P Global Market Intelligence.
The sector saw deal volume drop almost 14 per cent on the year for the quarter ended Mar 31, dragged by declines in mainland China and Australia, based on an analysis by the intelligence division of S&P Global released on Tuesday (May 7).
Apac’s lacklustre dealmaking activities mirrored a global trend where M&A announcements for the quarter fell to the lowest total since the onset of Covid-19 pandemic disrupted markets in Q2 2020.
Factors such as economic volatilities, higher funding costs and geopolitical risks deterred M&A activity in Apac, based on the analysis.
“These conditions are detrimental to M&A activity because they put a dent in confidence, and therefore the gap between buyers and sellers, valuations, and agreement of deals, persists – and that’s what we’ve been seeing in Asia-Pacific,” Raghu Narain, managing director and head of investment banking for Asia-Pacific at Natixis CIB, told S&P Global Market Intelligence.
China’s growth outlook remains dim
Nine deals were announced in mainland China in the first quarter of 2024, compared with the 24 deals the year before, and 33 deals in Q4 2023. Meanwhile, Australia registered 12 deals in Q1, down from 26 in the corresponding period last year.
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While a turnaround in Australia’s M&A is expected as potential bidders adjust to greater certainty on interest rates, deals are likely to remain muted in mainland China due to uncertainties around the country’s growth outlook, said Justin Tan, a partner at international law firm Mayer Brown.
“Uncertainty kills deals,” said Tan.
Mainland China has set its 2024 Gross Domestic Product growth target at about 5 per cent after comfortably beating a similar target with a growth of 5.2 per cent in 2023. The International Monetary Fund (IMF) projects China’s GDP to grow 4.6 per cent in 2024.
As investor confidence is crucial to drive dealmaking activities, significant dealmaking would only return to the market amid an upswing in market sentiment, based on the analysis.
India could buck the trend
S&P Global Market Intelligence’s data showed that India registered 27 M&A deals in the finance sector, up from 26 deals a year ago but down from 33 deals in Q4 2023.
Given the fast growing economy’s favorable demographics, ongoing reforms and growth opportunities, it could demonstrate resilience to global shocks, leading to robust dealmaking activities.
India expects its US$3.5 trillion economy to have grown 7.6 per cent in the fiscal year that ended March 31, compared with 7 per cent in the prior fiscal year. In its April regional economic outlook report, the IMF raised its 2024 growth projection for India by 0.5 percentage point to 6.8 per cent.
Pent-up demand brews optimism in Apac
“A backlog of deals and pent-up demand across the region also provide grounds for optimism about a turnaround in dealmaking in the coming quarters,” said S&P Global Market Intelligence.
Oluchi Ikechi-D’Amico, partner and Asia-Pacific capital markets community leader at EY-Parthenon, told S&P Global Market Intelligence that the underlying dynamics of Apac finance sectors suggest a cautiously optimistic outlook for finance M&A in the upcoming quarters. This is coupled with a strategic shift towards programmatic acquisitions and a potential resurgence in fintech M&A.
The promising outlook, however, is also contingent upon stablising macro environments and geopolitical tensions, Ikechi-D’Amico noted.
