Analysis

2015 Setting Up Nicely for Mid-Market Investments

Economy’s prospects in 2015

An economic recovery that appears to have found firm footing. A labor market that is posting strong job growth. Muted inflation that likely will stall the Federal Reserve’s first rate hike since 2006. Household and business balance sheets are the strongest they have been in years. These were some of the key takeaways from my recent conversation with Ira Kalish, Chief Global Economist, Deloitte Touche Tohmatsu Limited about the global economic outlook for 2015 and what it means for middle market companies.

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2015 Setting Up Nicely for Mid-Market Investments

February 20,2015

A blog post by Roger Nanney, national managing partner for Deloitte Growth Enterprise Services, Deloitte LLP

An economic recovery that appears to have found firm footing. A labor market that is posting strong job growth. Muted inflation that likely will stall the Federal Reserve’s first rate hike since 2006. Household and business balance sheets are the strongest they have been in years. These were some of the key takeaways from my recent conversation with Ira Kalish, Chief Global Economist, Deloitte Touche Tohmatsu Limited about the global economic outlook for 2015 and what it means for middle market companies.

So what does it mean? Dr. Kalish believes the US economy may have found a “sweet spot” in its recovery from the latest recession and there are few signs that growth will be derailed in the year ahead. He is of the mindset that low energy prices that are lifting consumer spending and lowering manufacturers’ costs are likely here to stay in the short term, with the economic benefits likely outweighing cons such as job cuts in the energy sector.

Further, Dr. Kalish suggests that the ripple effects of low energy costs may be holding an expanding array of other prices in check. Combined with lackluster wage growth, they are helping to keep the overall level of inflation well below the Federal Reserve officials’ long-term target and buying them more time before they have to start raising interest rates. Kalish believes bond yields are likely to remain “in the same neighborhood” this year and could even decline further, particularly if turmoil overseas prompts investors to flee to the safe haven of US Treasuries.

The resulting combination of returning demand and historically low capital costs may be opening an attractive window for middle market companies to invest anew in their businesses. There are some clear candidates for investment in 2015, and at least one area where companies may want to approach with extra caution.

  1. Talent. Generally speaking, income growth has been modest in the aftermath of nearly 3 million jobs added to payrolls last year, but wage pressures are ratcheting up when it comes to filling highly skilled positions. In fact, our latest biannual survey of mid-market executives found that nearly two-thirds expressed difficulty in finding new employees with the right skills, and one in five said skills shortages were holding back their company’s growth. Middle market companies can take a number of steps to attract skilled candidates in addition to offering more money, and now may be a good time to put those strategies to work.
  2. Equipment and technology. In the aftermath of the recession, many privately held companies put off replacing aging equipment and technology to conserve cash amid lingering market uncertainties. Now that growth has returned to many markets, they are gaining the confidence to boost their capital spending budgets and invest in productivity-enhancing equipment or emerging technologies such as cloud computing solutions or advanced business analytics, according to the findings of our latest mid-market perspectives report. Their timing couldn’t be better from a financing perspective: asset-based lending, a favorite funding mechanism among privately held firms, is a very active market right now and rates are still near historic lows. Before laying out significant sums or taking on new debt, companies would be wise to review their capital spending process to ensure the highest priority items are first in line and decisions are examined from a risk/reward standpoint.
  3. Global expansion. Most mid-market companies are focused on the domestic market, a tendency that is working in their favor with the US a definite bright spot in the global economy and a strong dollar weighing on international sales. Increasingly, though, they are turning their gaze abroad to reach new customers, diversify their operations or tap into new resources. Dr. Kalish says there is good reason for such companies to be cautious when investing in select international markets in 2015. Europe has seen some slight improvement in recent months, but the rising popularity of extreme political parties is adding to uncertainty in the region and may threaten to erode the European Union at some point. Meanwhile, recent growth figures provided by China may well in fact be underselling the severity of that nation’s slowdown as it copes with excessive debt. That said, if a company sees a pressing business opportunity to expand in those markets or others, Kalish thinks now may be a great time to pick up assets on the cheap.

    There are plenty of reasons to be optimistic about the economy’s prospects in 2015. Companies that invest wisely in the year ahead should be in a great position to capture new business and set the stage for long-term, sustainable growth.

As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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