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.
The United States and China have applied a host of levies on some of each other's imports and experts have cautioned that a continued trade war would ultimately affect global growth.
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."
Opportunities for Southeast Asia
Despite the patchy near-term outlook, Biller said he expects deal-making activity to continue in the region, particularly in sectors like consumer, technology and telecommunications.
"Increasingly, we are also seeing more cross-border activity and going forward, this trend should continue as large local companies look to expand regionally and regional champions look to go global," he said.
In Singapore, where there's a well-developed and liquid public equity market and a well-established regime for mergers and acquisitions, Biller expects to see more "opportunistic transactions" to continue, despite higher valuations. That suggests companies would continue to pounce on deals with good value.
Malaysia, having elected a new prime minister a few months ago, should see a pick-up in deal-making activity, while in Indonesia, there's growing traction in "minority-focused pre-IPO type private market activities."
Another opportunity that could materialize in the region is the restructuring of conglomerates.
"The rationale to have a multi-industry company is becoming less significant," Biller said. "There is real value that can happen through spin-offs or similar types of portfolio restructuring exercises, especially in some of the family-owned, multi-industry business that are prevalent across Southeast Asia."
Global deal-making appetite dips
Globally, corporate acquisition appetite fell to a four-year low and deal plans are subdued in part due to growing geopolitical concerns, according to a biannual survey from advisory firm EY released early in October.
Only 46 percent of global executives surveyed by EY said they had plans to acquire in the next 12 months — that number fell from about 56 percent a year ago. Rising regulatory uncertainty, ongoing Brexit negotiations and the U.S.-China trade dispute were said to weigh on M&A sentiment, according to the report, despite robust macroeconomic fundamentals.
"Geopolitical, trade and tariff uncertainties have finally caused some deal-makers to hit the pause button," Steve Krouskos, global vice chair of transaction advisory services at EY, said in a statement.
"Despite stronger-than-anticipated first-half earnings and the undeniable strategic imperative for deals, we can expect this year to finish with much weaker M&A than how it started," he said. "The good news is that companies will likely take the break in action as an opportunity to focus on integrating the many deals undertaken over the past 12 months.
Krouskos added that fundamentals and the strategic rationale for doing deals remain strong and that the appetite for acquisition will likely grow toward the second half of 2019.
Citi's Biller told CNBC that trade tensions between Washington and Beijing are having a "somewhat positive" effect in Southeast Asia.
"Companies are looking at the region as a potentially interesting supply chain solution for what's happening or potentially what's to come on the back of China-USA trade tensions," he said.