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Blocks of Housing & Development Board (HDB) apartments stand in Singapore, on Friday, Dec. 28, 2012.
Trade tensions and geopolitical developments have yet to weigh on deal-making sentiment across Southeast Asia — but the near-term outlook remains “patchy,” according to a senior investment banker.
David Biller, ASEAN head of corporate and investment banking at Citi, told CNBC that the volatility due to trade and political concerns has caused capital markets to be dysfunctional but it has not affected the underlying sentiment for the time being. The broad sentiment among businesses, he said, is “cautiously optimistic.”
“We are certainly seeing decent levels of activity but it is barbelled, with many smaller ‘tuck-in’ transactions and a handful of very large ones,” Biller said by email. What that means is there have been plenty of small deals happening along with a handful of very large ones, instead of a greater number of average-sized transactions.
Biller suggested that companies are going to buy businesses that are a strong fit for their long-term strategy instead of just acquiring an entity because it has good value: Future deals are “likely to be more strategic in nature and less opportunistic given where valuations stand today.”
Still, he emphasized that Southeast Asia’s mergers and acquisitions outlook is “patchy” for the next 12 to 18 months.
In the near term, some of the risks that could affect the region’s appetite for more deals include higher interest rates and the reduction of liquidity due to volatility in capital markets, according to Biller.
“In addition, notwithstanding the recent pullback in equity markets, fundamentally, valuations remain very full and once you place control premiums on top of that, it can make it challenging to justify some of the values that sellers are asking for,” he added.
Another concern is the move in the U.S. dollar. The dollar index, which measures the greenback against a basket of currencies, is up more than 4 percent so far this year, according to Thomson Reuters Eikon data.
The dollar has “strengthened considerably year-to-date, which is increasing the cost of funding for a number of potential acquirers from the region,” Biller said. That is “making it more challenging for them to fund their transactions.”