As the global economy ventures gingerly into 2013, with no resolution in sight to the ongoing paralysis within the eurozone and uncertainty remaining around the effectiveness of the US solution to its New Year fiscal problems (the ‘fiscal cliff’), the asset finance and leasing industry can still find encouraging trends from the last 12 months and see solid prospects for the year ahead.
by Brendan Gleeson, Director Global Business Development and Strategy
Originally published on World Leasing News on January 7, 2013
One region that is looking forward to growth is Asia Pacific, and of course at the centre of that is China – also the focus of attention regarding the global economy generally. This is therefore an auspicious time for international consultancy and software services provider White Clarke Group to open a new office in Shanghai.
Asia Pacific is a vibrant asset finance market that has witnessed spectacular growth. In China, growth in the sector slowed somewhat in 2011 but picked up again in 2012, a trend that is expected to continue in 2013. The US leasing market – still by far the largest – has more than regained lost ground and will look to progress. The UK market is showing signs of picking up, but much of the eurozone remains in the doldrums.
The Global Economy
There are few comprehensive details available yet for regional asset finance and leasing markets in 2012, but at least quarterly data is available from some countries and trends can be seen from this information. However, there is plenty of general economic data available, and trends in overall economic performance provide strong indicators as to the future health of leasing business.
The International Monetary Fund forecasts global GDP will have grown 3.3% in 2012, down from 3.8% in 2011, but that growth will rise to 3.6% in 2013 and continue to grow thereafter (source: IMF World Economic Outlook Database, October 2012). In the developed economies, the most hopeful prospects are for the US, and it remains the case that a consistent lift in the US economy is reflected globally. This is equally true for the leasing market, as the US forms such a large part of the whole.The Munich-based Ifo Institute for Economic Research, in its fourth quarter 2012 World Economic Survey (WES), registered a slight decline overall in assessments of both the current economic situation and the economic outlook, stating: “The world economy is treading water.” WES experts, however, reported expectations had become more positive in the US and remain positive in Asia Pacific.
GDP growth in the developed economies
Source: Thomson Reuters
GDP growth in the eurozone
GDP growth in the BRICs economies
Source: Haver Analytics
Among developed nations, the debate continues as to whether the various financial instruments such as quantitative easing that have been used by governments and central banks in attempts to kick-start flagging economies have been successful, but the stock markets have overall shown their approval. Indices in developed markets have been remarkably resilient in 2012, despite the overall economic problems faced. Stock markets in the US, the UK, the eurozone and also Japan have ended the year at unexpectedly high levels.
In Japan, for example, the Nikkei Index ended 2012 above the psychologically significant 10,000 level – up 23% for the year, the biggest annual gain since 2005 and the first annual improvement in three years. This is an indication of growing confidence in the economy which, along with a weakening currency, helps exporting companies. This has been reflected by growth for car manufacturers such as Toyota and Honda, and this in turn signals potential growth in the leasing market at home and abroad.
In Europe, 2012 proved slightly calmer than 2011, aided by the promise from eurozone leaders and European Central Bank to do “whatever it takes” to save the single currency. However, the sovereign debt crisis looms large over the region, and this has a knock-on effect globally as exporters from growing economies face an increased risk of default among eurozone importers.
The risk of further civil unrest remains in Greece and Spain, but there was one singular vote of confidence at the end of the year: rating agency Standard & Poor’s upgraded its position on Greek debt, raising it from ‘sovereign default’ to B-, in a move that S&P stated reflected the determination of EU member states to preserve Greece’s membership. A further boost came from the Greek stock market, which ended the year up 32%, albeit from a low after a major drop over the past two years.
The UK, meanwhile, is trying to maintain its position of being both in and out of the EU, and the economy remains stagnant. However, the major eurozone economy is Germany and although there have been worrying signs of lack of growth there too, recent indicators are of a rise in future expectations. The Ifo Business Climate Index for German industry and trade continued its return to an upward trend in December, and while companies throughout 2012 have not assessed their business situation very favourably, at the close of the year they were considerably less pessimistic about future business developments.
German business expectations
In comparison, the US economy has shown a continuing upward trend with the momentum looking to continue, at least for the initial part of 2013, following the last-minute action to avoid the fiscal cliff. However, the essential policy differences and basic antagonism between the President and Congress remain and although global markets will be immediately reassured, the longer-term issues remain. And at home small businesses, the backbone of the economy overall and the leasing market in particular, will not be impressed by the lack of resolution.
Among growth economies, stock market performance has been variable, but here the undeniable underlying strength of the consumer markets mean that these economies will continue to grow ahead of those of the developed nations. There is a solid macro-economic environment in much of Asia Pacific and the global growth economies (it is no longer just the BRICs, but now the EAGLEs – emerging and growth-leading economies such as Indonesia, Korea, Mexico, South Africa and Turkey). The drivers are investment, particularly in infrastructure, and where there are construction projects there are growth prospects for asset finance and leasing.
Global commodities markets performed well overall in 2012, re-energized later in the year by signs that the Chinese economy is heading towards a pick-up. There had been a stutter in the middle of the year, brought on by a fall in commodities demand in the eurozone, adding further pressure to the brakes which was already being felt in China, but there is confidence that the Chinese economy will have a ‘soft landing’ and that its rate of growth will recover from 2013.
This is anticipated to be the basis of a gradual recovery of global growth in 2013. The most dynamic region is understandably expected to be Asia Pacific, led by China which will aid growth in neighbouring economies such as Korea, Australia and Indonesia.
The Leasing Markets
This is a brief overview of activity and prospects for some main leasing markets. Some market challenges are common to all, such as the continuing sovereign crisis in Europe, to which resolution will eventually be found but which will continue to affect the markets globally. Other common issues include the adoption of international accounting standards, which individual nations continue to treat with varying degrees of interest. And other common challenges, such as the lack of appetite to lend among traditional banks, are opportunities to encourage new entrants to the market.
In the Asia Pacific region, and specifically China, the leasing industry has seen stellar growth, although even here this has been tempered by the global economic crisis. Despite this, the Chinese market rose an impressive 50% in the first nine months of 2012, and total trade volume for the year is forecast to reach RMB1,500bn. Growth of 30-50% is confidently predicted for 2013. Increased domestic demand and consumption across industries will drive leasing new business volumes, with the auto/fleet sector expected to play a significant part in this.
As with other growth markets, leasing in China faces a number of immediate challenges, such as access to funding for small and medium-sized businesses, access to reliable accounts for lessors, better regulation in general and particularly regarding the rising rate of default, new tax legislation, and corruption. The central bank has moved to tighten liquidity control, as central government has moved to open up the market. Both liquidity and risk need to be carefully managed.
However, the opportunities are great, especially for foreign-invested lessors, and becoming more attractive with national and regional government incentives. The market is becoming more aware as vendors, foreign banks and multinationals drive the business. The sheer market size, its rapid growth and comparably low leasing penetration are all key incentives for foreign leasing companies seeking to expand operations into China. Care needs to be taken, however, as entering the Chinese market without the right operating model and a framework for managing risk and growth could put lessors themselves at risk.
According to the latest research from the Equipment Leasing and Finance Foundation, total equipment and software investment for 2012 is expected to reach $1.28tn, with total equipment finance volume estimated at $725bn, an increase of more than 9% on 2011 figures. This would mean the US market has finally come back to surpass the 2007 pre-recession peak for equipment finance volume.
The Equipment Leasing and Finance Foundation forecasts that in 2013, of the projected $1.3tn to be invested in plant, equipment, and software, $742bn is expected to be financed through loans, leases, and lines of credit, representing a further increase of 2.3% on the 2012 estimate. (Source: US Equipment Finance Market Study 2012-2013, Fact Sheet; US Department of Commerce Bureau of Economic Analysis and IHS.)
Although the market is expected to grow, it is understandable given its size and maturity that the rate of growth is predicted to slow. In its 2013 Equipment Leasing and Finance US Economic Outlook the Foundation sees relatively weak growth in the first half of the year due to low demand and the previously noted fiscal uncertainty. However, incentives to invest are expected to return in the second half, partly through improving conditions in the housing sector and also an anticipated relief from policy uncertainty.
Increasing liquidity in a slowing market is going to drive competition for market share. In this mature market, instead of trying to offer the least expensive lease transaction available, the focus will tend towards relationship building, and in leveraging technology to create end-to-end lifecycle products. Advances in software mean that technology is a sector that will continue to expand and require investment.
In spite of the uncertainty surrounding the UK economy as a whole and its ability to maintain any degree of recovery, data published by the Office for National Statistics shows that total business investment grew by 4.8% in 2012. Better than this, according to the latest Finance and Leasing Association (FLA) data, asset finance investment grew by 7% in the 10 months to October 2012 compared with the same period in 2011.
FLA figures show new asset finance business in October amounted to £1.93bn, 17% higher than in the same month a year earlier. Over the 12 months from October 2011 to October 2012, asset finance new business volume, excluding deals of more than £20m, grew 10% to £20.9bn.
The encouraging signs are that new business grew virtually across the board – in the plant and machinery, auto, commercial vehicle, IT, and business equipment sectors – leading to confident expectations for continued growth in 2013. Such market confidence is boosted by the fact that mainstream bank lending shows no sign of picking up, leading more companies to turn to leasing.
The UK leasing market was dealt a blow with the announcement that an important lessor, ING Lease (UK), would fund no new business from December 2012 and run down its portfolio thereafter. However, after the initial shock – more at the suddenness of the announcement than the regrettable situation of another major bank reducing operations to increase its capital balance – the potential benefit of filling the gap is being taken up by other established funders, and there is confidence that new funders will see this as an opportunity to enter the market.
Performance figures from Leaseurope for the asset finance market across Europe as a whole are only available for the first half of 2012. These show the overall market standing still, with those nations that are experiencing sovereign debt difficulties suffering accordingly. However, there are a few exceptions apart from the UK mentioned above, in particular Russia – here the industry grew 20% and the market remains very much a growth prospect.
Positive indicators in Europe are that many companies are targeting growth, suggesting that the sector is not pursuing a strategy of retrenchment.
The largest leasing market in Europe and the economic driver of the eurozone is of course Germany, and here recent data is available. The German Leasing Association (BDL) reported that for 2012 investment in the sector totalled €49.3bn, a marginal rise of 0.5% on 2011. The auto sector accounted for most of the new equipment business transacted. Leasing increased its share of the overall investment market, accounting for 53% of all externally financed investments.
Looking ahead, the BDL stated that future developments will be shaped by companies’ willingness to invest, which will depend on how confident they feel about the stability of the eurozone. “Signs of an upturn are beginning to appear, but an overall improvement in the investment climate any time before the second half of 2013 is unlikely.”
Have a look in our Knowledge Centre and find all country reports as free downloads.
The Global Auto Market
The auto sector looks set for a year of subdued growth overall, in terms of new car sales, according to research firm IHS Automotive. As mentioned above, further strong growth is expected in China, along with India – both with near double-digit increases. Sales will rise again in the US, and the markets in Russia and Canada will also see growth in 2013. However, apart from China none of these countries is predicted to see increases at 2012 levels.
The markets facing negative sales growth are Japan – which, despite the rise in car production noted earlier, is due to see a withdrawal of subsidies to buyers – and Europe, including the UK. Auto sales in the EU have been trending downward for several years, but in a number of countries, such as the UK, production is forecast to increase. With production exceeding sales there is increased opportunity for leasing.
Predicted change in auto sales
Major EU new car markets, 2000–12
In Europe, 2012 proved slightly calmer than 2011, aided by the promise from eurozone leaders and European Central Bank to do “whatever it takes” to save the single currency