For EMEA multinational executives, 2017 brings a range of potential disruptions which complicate planning, make customers more hesitant, and risk distracting local teams from focusing on execution. While the region with its complexity and wide geography is constantly experiencing disruptions, there is currently an unusually high combination of potentially meaningful changes in operating conditions in markets that are important enough to make a difference to the broader portfolio.
In Western Europe, Brexit, combined with elections in Holland, France, and Germany, has raised concerns about the fragility of the EU and the risk of significant changes in policy. We believe that the key election to monitor is the one in France, while the rest are less risky than they appear to be in the media. Further east, Turkey is holding a critical referendum on a presidential system on April 16th, while Iran is holding presidential elections on May 19th that could disrupt the nuclear deal if a hardliner is elected. In southern Europe, the risk of early elections in Italy that could exacerbate weakness in the banking sector will loom over the market this year, while the poor health of president Bouteflika in Algeria raises questions about how well-managed a transition to a new leader would be, especially in light of parliamentary elections in the country on May 4. It’s a long list, and this is before we’ve even considered potential disruptions stemming from the presidency of Donald Trump!
One risk, however, that we believe EMEA executives are not monitoring closely enough is through linkages to China’s economy. China’s complex economic rebalancing is fraught with risks that a mismanagement of the process and vulnerabilities in the financial sector could result in a hard landing. A second risk is the trade relationship with the US. Prominent Trump administration officials have reinforced a view that the US needs to use harsher measures against Chinese exports. In a worst-case scenario, this could prompt a response that initiates a trade war, possibly accompanied by a devaluation of the renminbi. While these are both low-likelihood events, they would hurt EMEA markets through currency depreciations, drops in prices for oil and metals, as well as reduced exports to China, spilling over into countries as diverse as Kazakhstan, Zambia, and Saudi Arabia. Our China sensitivity index below gives a sense of the relative exposure of the EMEA portfolio to these events:
When an organization faces so many diverse and complex risks, the task of assessing them and preparing a response can seem overwhelming, resulting in organizational paralysis – an attitude of “we’ll deal with it when it happens.” We’ve also seen volatility fatigue, combined with greater skepticism toward forecasts about the future after Brexit and Trump’s election, cause some multinationals to conclude that most things cannot be predicted accurately enough and that trying to make predictions is a bit of a useless exercise. This is an understandable, but dangerous attitude.
The fact that Brexit and Trump’s election both happened underscores the importance of considering low-likelihood disruptive events before they happen as part of the regular planning cycle. At FSG, we had assigned each 30% likelihood of taking place, but many companies deemed that insufficient to warrant preparing. While not every firm has resources for complex contingency planning, senior executives should at minimum have a clear understanding of what are the biggest external risks to their business, how they would impact operations and performance, and at what point any mitigation plans need to be initiated for risks that increase in likelihood. Companies that are even a little prepared for when disruption hits their business stand a real chance of not only mitigating its impact, but also getting ahead of competitors. The skill set required to do so is becoming increasingly critical for EMEA multinationals, and companies should ensure they are able to leverage it as they deal with all that 2017 promises to bring.
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