Aug 14, 2020, 3:53 PM ETInterview

Evolving Corporate Sentiment in Europe

European CEO sentiment has evolved through three distinct phases:
- Phase 1: Immediate focus on business continuity, liquidity, and managing lockdown impacts.
- Phase 2: Stabilization focused on remote work protocols and short-term performance visibility.
- Phase 3 (Current): A shift toward growth mode and strategic decision-making, marked by a noticeable pickup in M&A activity.
Current confidence levels have recovered slightly in recent weeks, moving from an internally focused stance on employee safety to a broader strategic outlook.
Key uncertainties driving decision-making include:
- The timing and efficacy of vaccine rollouts.
- The trajectory of consumer behavior linked to health measures.
- The duration and eventual tapering of global government fiscal support schemes.

A primary operational debate centers on the return to office to balance efficiency gains from remote work against the need to drive R&D and corporate culture.
Executives express significant concern regarding their ability to foster innovation within a fully remote environment.
Scenario planning is expanding beyond internal drivers to address major geopolitical risks:
- US-China relations.
- The looming Brexit deadline.
- Financial instability in the southern Eurozone.
- Emerging market supply chain dynamics.
- Implications of the US presidential election.
Capital structure debates have shifted from liquidity management to optimizing the post-COVID balance sheet, including:
- Optimal dividend policies.
- Leverage targets in a low-to-negative interest rate environment.
- Strategies for engaging with government financial support.

M&A volume is expected to accelerate as stabilization in infection rates increases confidence to transact.
Q2 Europe saw just under 40 deals valued above $1 billion, primarily driven by:
- Corporate sales and spinoffs.
- A broader trend of corporate simplification to liberate value from conglomerates.
The crisis has catalyzed exits of non-core businesses, likely accelerating as private equity firms deploy unprecedented "dry powder."
All-equity merger transactions are rising within sectors where relative valuations are similar and significant synergies exist.
Future deal activity may face constraints due to anticipated increases in government intervention in sectors deemed of national importance (e.g., healthcare, aerospace, defense, technology).

Corporate responsibility and social license to operate have moved to the forefront of the CEO agenda, replacing the ability to opt out of social and political issues.
Leadership expectations now extend to specific issues including racial equity, relations with China, and platform boycotts.
ESG investment trends show significant divergence over the last 18 months:
- Equity market inflows into ESG funds exceeded $125–$130 billion.
- Outflows from non-ESG funds were more than double that amount.
- ESG assets under management in Europe rose from 2% to 8% in a similar period.
Industry frustration remains high regarding the lack of a unified ESG scoring standard, though a shift toward standardized rating methodologies (similar to credit ratings) is anticipated.

Confidence in European politics has reached a high point, attributed to the speed and coherence of decision-making by EU leaders and the ECB compared to prior crises.
The composition of European growth is shifting away from traditional dominance in oil, gas, and finance toward:
- Technology sector expansion matching US growth rates.
- Accelerated growth in the healthcare sector.
The combination of technological and healthcare growth, alongside active renewable and green energy trends, is helping to redress the historical growth imbalance between Europe and the US.