Foreign investment into Europe staged a patchy comeback in 2015 on the back of signs of economic recovery, and advantages stemming from low oil prices and weakening local currencies against the US dollar. Foreign capital backed some of the largest direct investments ever recorded in traditional sectors, such as automotive, telecommunications and real estate. Meanwhile, deals such as the £71bn ($102.4bn) acquisition of UK brewing firm SABMiller by Belgian counterpart Anheuser-Busch InBev (AB InBev) led to record volumes of mergers and acquisitions (M&As) being recorded.
“We observed a recovery in crossborder investment into Europe [in 2015], partly led by economic recovery and corporate reconfigurations,” says James Zhan, director of the investment division at Unctad.
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With many developing economies across the globe struggling because of collapsing commodity prices and growing political pains, Europe, particularly the EU, is trying to reassert its position as a leading destination for crossborder investments. It still has a long way to go though. Its economic recovery remains on shaky ground, and 2016 has brought with it new uncertainties, both in the economic and political arenas.
Big hitters
FDI inflows into the EU reached $426bn in 2015, up by 68% from a year earlier, but still far less than the $793bn recorded in 2007, according to preliminary figures from Unctad (which includes both greenfield investment and crossborder M&A). FDI into North America for this period posted a three-fold increase to $429bn, largely due to a spike in M&A, and FDI into developing Asia (Asia excluding Japan) grew 16% to $548bn.
Crossborder investment into greenfield projects in the EU increased by 14% year on year, totalling $139.8bn in 2015, according to Unctad figures. This recovery was anything but uniform, with just a handful of European countries recording increases on the previous year. Among these, the UK stands out as one of the countries to stage a recovery. Its investment inflows were boosted by some mega projects in the energy, telecommunications and real estate sectors, according to figures from greenfield investment monitor fDi Markets.
Danish conglomerate Maersk kicked off a £3bn development of the Culzean gas field off the UK's east coast, the largest discovery in the North Sea in years, following approval by UK authorities in August. Maersk’s investment represented one of the few bright spots in the otherwise bleak outlook for the whole North Sea oil industry, which has been hit hard by collapsing Brent Crude prices. Virgin Media, the UK telecommunications operator owned by US group Liberty Global, announced a £3bn upgrade of its broadband network in February. The new year started with another bang as Danish energy group Dong sanctioned a huge £3bn investment into Hornsea Project One, a 1-gigawatt offshore wind farm off the East Yorkshire coast.
The picture in mainland Europe was more fragmented, with a number of cyclical sectors, such as automotive and real estate, driving investment in southern and eastern Europe, and software and IT and business services growing at moderate pace across the region.
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German automaker Volkswagen Group announced multi-billion euro upgrades of its production facilities in Spain and Italy, plans which so far the group has upheld in the wake of its emissions scandal, which hit the company in the closing months of 2015. The year also saw Indian conglomerate Tata announce a $1.4bn investment in a new Jaguar Land Rover production facility in Nitra, Slovakia, as well as a £950m upgrade of its operations in the UK. However, the tale of the European automotive industry remains a bittersweet one.
“The net value in terms of job creation or capital expenditure of FDI into traditional industries, such as automotive, telecommunications or even food industries, is not crystal clear because there is still much restructuring going on in these sectors,” says Marc Lhermitte, head of international location advisory services at EY.
Digitally dawdling
With an accumulated stock of FDI of more than $9171bn in EU countries, investment levels remain high compared with the stock accumulated in both the US and developing economies. This leaves room for restructuring in sectors that face high competition from emerging economies and are witnessing falling margins, such as manufacturing, but also the financial industry. The latter, which played a large role in the investment boom that Europe experienced before the financial crisis, recorded another bleak year in terms of investment inflows in 2015, according to fDi Markets figures, with major banking groups investing less in Europe.
“On the other hand, net value definitely lies in the digital transformation of the European economy, which is a big driver of investment in every mature market. Software manufacturers, e-commerce players, but also suppliers of new ICT systems, have been very active in Europe, particularly in those countries where they can find skilled people," says Mr Lhermitte.
With hundreds of projects all over the region, but especially US technology giants such as Google, Facebook and Apple sinking hundreds of million of dollars in northern Europe to upgrade their regional infrastructure, the software and IT sector showed continued dynamism in 2015. Still, there is a lingering feeling that European countries can do more to speed up the ongoing transition to a digital economy.
“Europe definitely needs to build a real digital, entrepreneurial economy, a sort of European Silicon Valley experience,” says Mr Lhermitte.
Movers and shakers
A significant increase in M&A proved a real game-changer in 2015. Europe enjoyed a fair share of the global M&A bonanza, and recorded M&A deals totalling $1002bn in 2015, the highest level recorded since 2007, according to analyst Mergermarket. Crossborder M&A increased in the region by 67.6% year on year to $269.2bn in 2015. Mega operations such as the aforementioned AB InBev-SABMiller merger and the £36bn acquisition of UK-based oil and gas firm BG Group by Anglo–Dutch multinational Shell were the headline deals in a year that saw 10,101 M&As, according to Bloomberg figures, again the highest figure since 2007.
M&A boomed thanks to three major forces, according to Philip Whitchelo, vice-president of strategy and product marketing at Intralinks, a company that tracks early-stage M&A deals. “In most economies, inflation is very low, which makes it very hard for companies to grow organically and thus they turn to M&A to boost profits, cost-cutting and synergies," he says. "Interest rates are at record low levels, with debt financing that has never been cheaper than today. A third element is that there was a huge increase in headline deals in 2015. That frightens competitors that don’t want to be leapfrogged [and force them to react accordingly].”
Intralinks forecasts that the volume of M&A deals in the first half of 2016 is going to be more than the volume announced in the first half of 2015, thanks to a growing pipeline of deals in sectors such as real estate and retail. But it notes that there is less interest in energy, power, materials, metals and mining and hi-tech industries.
“The fact that we are seeing an increase in those sectors tells us that dealmakers are quite confident on the economic future of Europe,” says Mr Whitchelo.
Potential pitfalls
Looking forward, a number of risks loom. Economic recovery in western Europe is still fragile and growth forecasts are being revised downwards. At the same time, there is a widespread consensus within the business community that if the UK exits the EU, which it could do following a referendum due to be held in 2016 or early 2017, it would harm the investment climate on both sides of the Channel.
Elsewhere, eastern Europe, which has been a big magnet for foreign investment in recent years, is experiencing a rise in governments that have, in the words of Hungarian prime minister Viktor Orban, a sweet tooth for “illiberal democracy”. This, it is feared, could damage the integration of European markets, which has been key to unlocking investment in the region. Europe's migrant crisis may further slow the region's integration process. On top of this, Europe’s periphery remains burdened with the political troubles stemming from the crises in Ukraine and Syria, which produced deep divisions between the EU bloc and both Russia and Turkey.
Investors created some momentum in 2015 as a combination of favourable conditions materialised in certain countries, but it will take additional time and effort for Europe to set the foundations for a homogeneous, long-term investment recovery.