As the dollar strengthens and commodity prices fall, emerging markets will not provide stable growth in 2016, and capital flows will cause substantial financial market volatility worldwide. With no “white knight” market capable of saving the global economy, there will be massive pressure on multinational corporations to prioritize the right markets.

FSG spent 2015 discussing with clients – regional and strategy executives at multinational firms – the drivers of a global economic slowdown. Sustained low oil prices reduce energy exporters’ government budgets but have done relatively little to boost consumer wealth. Substantial currency volatility makes imported products more expensive, reducing local sales and disrupting addressable markets for many multinationals.

Global economic events in 2015 solidified the drivers of global economic conditions, all of which are the result of a crisis of confidence in global economic activity and of financial markets’ inability to price those indicators. 2015 showed the first-order impacts of lower energy prices and a strong dollar. In 2016, multinational executives will begin to see the secondary impacts of these changes, while simultaneously facing the resulting slow economic growth.

Adjusting business plans for falling government budgets, changing product pricing, and fluctuating exchange rates is a part of the business planning process every year. However, the pace and magnitude of required adjustment was qualitatively greater in 2015. This will be only more apparent in 2016.

FSG is thus urging its clients to identify the best pockets of opportunity for their business, present a local product mix that will address that opportunity, and build an organization equipped to adjust to a fast-changing environment. FSG Clients can use our newly-released Global Economic Outlook for 2016 as a tool in approaching these strategic goals.

The corporate experience will be volatile

While FSG’s forecasts provide a baseline view for each country and region, we expect substantial volatility within those averages. For example, zero percent inflation growth in a country may reflect rapid increases and declines in prices, rather than no change throughout the year. For multinational executives, economic news will feel chaotic. Annual forecasts will not adequately depict the magnitude of changes that are likely to occur in key markets in the coming year. Substantial financial markets volatility will make inflation and exchange rates particularly difficult to track, as annual averages will miss consequential daily or monthly movements.

What’s more, slowing growth increases the likelihood of political disruption, as governments are forced to make difficult choices including spending and subsidy cuts, changes in exchange rate policy (e.g. releasing pegs), or increased protectionism. When building scenarios for each country, FSG’s research team identifies downside risks and upside opportunities for the business environment. When considering 2016, downside risk is substantially greater than the upside opportunity in most countries. In this type of environment, executives can count on an increased payoff from careful scenario planning and sensitivity analysis.

Companies should rigorously re-prioritize their markets

As growth slows and the opportunity for disruption increases, multinationals will need to focus on how to prioritize their incremental investment – whether for the highest growth or most stable business opportunity. This means considering not only country opportunities but also customer segments and sub-national categories.

At the country level, many companies have been disappointed by the shift or outright disappearance of addressable markets in recent months. Foreign products have become more expensive relative to local substitutes, putting pressure on companies to cut prices or lose market share. However, the dual challenges of price shifts and slowing growth need not mean margin erosion. Instead, companies can consider how to improve production processes and marketing strategies maximize return.

For example, some companies are considering more effective hubbing strategies to reach the highest value additive markets, or higher-growing frontier markets that were not priorities in the past. Others are looking within countries to target provinces or states experiencing substantial growth. Similarly, some MNCs are halting their wider country strategies in order to focus on major cities, where consumer spending is higher and distribution is more consolidated.

A final approach that many clients choose is to re-segment their customers altogether. Local currency depreciations have prompted many customers to trade down, eroding sales of high and mid-priced products. Companies who cannot compete on price are thus focusing in on those high-value segments where exceptional customer service and product quality can maintain or even improve margins despite a challenging economic environment.

The external environment will be challenging for business in 2016, but plentiful opportunity exists. Companies will feel pressure to localize and should thus carefully prioritize their best bets. Disruptions are certain to occur, but local strategic capabilities, such as identifying and verifying leading indicators, scenario planning, monitoring and course-correcting, will pay huge dividends.

For FSG clients, please contact your Client Relationship Director to schedule a briefing with one of our analysts to discuss how our 2016 outlook can help inform your strategy for the coming year. Not a client? Contact us for more information about our services.