The Deloitte CFO Survey: 2013 Q2 results

Major UK businesses shifted towards expansionary strategies in the second quarter, highlighting a sharp rise in risk appetite at the top end of the corporate sector. The recession-era focus on corporate cost cutting and debt reduction is easing and expansion is coming back onto the agenda for many businesses.

In a sign of an improving domestic outlook, the shift to more pro-growth strategies has been driven by companies which earn the majority of their revenues in the UK.

The latest survey took place in the second half of June, a period of turbulence in financial markets, and one marked by concerns about the withdrawal of quantitative easing in the US and a cash crunch in China. Nonetheless, CFOs’ perceptions of macroeconomic and financial uncertainity facing their businesses have fallen to a three-year low. Earlier this year, CFO respondents said that economic and financial uncertainty was the biggest single factor weighing on investment. A less risky environment clearly bodes well for business investment. CFOs’ expectations for hiring and investment are back to where they were in early 2011 when the world seemed set fair for recovery.

Q2 2013

Planning for growth

The Deloitte CFO Survey

July 2013

Chart 1. CFO priorities: Expansionary vs. defensive strategies

Average of the % of CFOs who rated expansionary strategies (introducing new products/services or expanding into new markets, expanding by acquisition and increasing capital expenditure) and defensive strategies (reducing costs, reducing leverage and increasing cash flow) as a strong priority.

39%

Defensive strategies

Expansionary strategies

35%

31%

19%10Q3

10Q4

11Q1

11Q2

11Q3

11Q4

12Q1

12Q2

12Q3

12Q4

13Q1

13Q2

23%

27%


For large companies shortages of capital no longer stand in the way of investment. CFOs report that credit is cheaper and more easily available than at any time in the last six years.

Business optimism has risen for the fourth consecutive quarter and is now well above average. It is symptomatic of the changed mood that a record 45% of CFOs say that now is a good time to take risk onto their balance sheets. The last five years demonstrate that corporate sentiment is changeable, responding to the ebb and flow of news and shifts in financial markets. Uncertainty has not died, but it has declined. Rising risk appetite and a shift towards expansion show that large UK corporates are increasingly planning for growth.

AuthorsIan StewartChief Economist020 7007 [email protected]

Debapratim DeSenior Economic Analyst020 7303 [email protected]

Alex ColeEconomic Analyst020 7007 [email protected]

Contacts

Ian StewartChief Economist020 7007 [email protected]

Mark FitzPatrickVice Chairman and CFO Programme Leader020 7303 [email protected]


Optimism rises

CFO optimism has risen for the fourth consecutive quarter and now runs above its long-term average.

Chart 2. Business confidenceNet % of CFOs who are more optimistic about financial prospects for their company now than three months ago

Less

opt

imis

tic

Mor

e op

tim

isti

c

-70%

-50%

-30%

-10%

10%

30%

50%

70%

12Q4

13Q2

12Q1

11Q2

10Q3

09Q4

09Q1

08Q2

07Q3

CFO perceptions of economic uncertainty have fallen significantly since 2012.

73% of CFOs believe their businesses face an above normal, high or very high level of external macroeconomic uncertainty, down from a peak of 97% in late 2011.

Chart 3. Uncertainty% of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high

68%

73%

78%

83%

88%

93%

98%

13Q2

13Q1

12Q4

12Q3

12Q2

12Q1

11Q4

11Q3

11Q2

11Q1

10Q4

10Q3

Optimism rises

Fears about a break-up of the euro area have continued to ease.

The probability CFOs assign to the euro area breaking up in the next 12 months has fallen from 36% to 9% in the last year.

Chart 4. Average probability of euro break-upProbability assigned by UK CFOs to the likelihood of any of the existing members of the euro area not being in the single currency in the next 12 months

37%

26%

36%

27%

22%

18%

9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

13Q2

13Q1

12Q4

12Q3

12Q2

12Q1

11Q4

Optimism rises

Rising risk appetite

Recent revisions to official data show that the UK narrowly avoided a double-dip recession at the beginning of 2012.

Concerns about the UK sliding back into recession have eased. On average, CFOs assign a 23% chance to the UK experiencing a recession in the next two years.

Chart 5. Average probability of a double-dip recessionProbability assigned by UK CFOs to the likelihood of a renewed recession in the next two years

20%

25%

30%

35%

40%

45%

50%

55%

60%

13Q2

13Q1

12Q4

12Q3

12Q2

12Q1

11Q4

11Q3

11Q2

11Q1

10Q4

10Q3

10Q2

10Q1


Chart 6. Risk appetite% of CFOs who think this is a good time to take greater risk onto their balance sheets

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

13Q1

12Q3

12Q1

11Q3

11Q1

10Q3

10Q1

09Q3

09Q1

08Q3

08Q1

07Q3

Improving business sentiment and reduced perceptions of uncertainty have bolstered corporate risk appetite.

Risk appetite among CFOs is at the highest level since the survey began. 45% of CFOs think now is a good time to take greater risk onto their balance sheets.

The US equity market reached all-time highs in May 2013 as investors shifted into higher risk assets on hopes of an acceleration in America’s recovery.

But equities dipped in late May on fears that the US Federal Reserve would slow its programme of quantitative easing. It is striking that CFOs’ appetite for risk has risen despite turbulence in equity markets during the survey period.


Chart 7. Standard & Poor’s 500 equity index

600

800

1,000

1,200

1,400

1,600

2007 2008 2009 2010 2011 2012 2013

CFOs report a continued improvement in their companies’ financing conditions.

Our panel of CFOs, mostly representing large UK corporates, sees credit as being cheaper and more easily available now than at any time in the past six years.

Cre

dit

is c

ostl

yC

redi

t is

che

apC

redit is availableC

redit is hard to get

Chart 8. Cost and availability of creditNet % of CFOs reporting credit is costly and credit is easily available

Cost of credit (LHS)

Availability of credit (RHS)

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

13Q1

12Q3

12Q1

11Q3

11Q1

10Q3

10Q1

09Q3

09Q1

08Q3

08Q1

07Q3

Easy financing conditions

Att

ract

ive

Una

ttra

ctiv

e

Chart 9. Favoured source of corporate fundingNet % of CFOs reporting the following sources of funding as attractive

Bond issuance

Bank borrowing

Equity issuance

-60%

-40%

-20%

0

20%

40%

60%

80%

07Q3

08Q1

08Q3

09Q1

09Q3

10Q1

10Q3

11Q1

11Q3

12Q1

12Q3

13Q1

Raising debt, through bond issuance or bank borrowing, remains CFOs’ clear favourite for financing their businesses.Equity issuance has also gained favour among CFOs this year.

The general picture from this survey is of a corporate sector which is unconstrained by capital shortages.


Incr

ease

Dec

reas

e

Chart 10. Outlook for corporate revenues and marginsNet % of CFOs who expect UK corporates’ revenues and margins to increase over the next 12 months

Revenues

Operating margins

-70%

-50%

-30%

-10%

10%

30%

50%

70%

13

Q2

13

Q1

12

Q4

12

Q3

12

Q2

12

Q1

11

Q4

11

Q3

11

Q2

11

Q1

10

Q4

10

Q3

CFOs’ expectations for revenue and profit growth are at the highest level in two-and-a-half-years.


CFOs are placing greater emphasis on expansion through introducing new products or services and by acquisition. They have also softened their focus on cost reduction to the lowest level in two years.

Chart 11. Corporate priorities in the next 12 months% of CFOs who rated each of the following as a strong priority for their business in the next 12 months

Disposing of assets

Reducing leverage

Raising dividends or sharebuybacks

Increasing capitalexpenditure

Expanding by acquisition

Reducing costs

Introducing new products/services or expanding

into new markets

Increasing cash flow 40%

38%

34%

21%

14%

13%

12%

5%

39%

35%

42%

17%

15%

18%

13%

6% 2013 Q2 2013 Q1

CFOs less defensive

Our index of corporate expansion sums up the overall balance of CFOs’ priorities, netting defensive business strategies, such as cost control, off against expansionary ones. UK-facing businesses, those that derive more than 70% of their revenues from the UK, have been consistently more defensive than their international facing peers. This seems to be changing. UK-facing companies are now more expansionary than at any time in the last two years.

Expa

nsio

nary

Def

ensi

ve

Chart 12. Index of corporate expansion: International & UK-facing corporates

Difference between the arithmetic averages of the % of CFOs who rated expansionary and defensive strategies as a strong priority for their business in the next 12 months.

Expansionary and defensive strategies defined under Chart 1.

International

UK-facing

-30%

-20%

-10%

0%

10%

20%

30%

13Q2

13Q1

12Q4

12Q3

12Q2

12Q1

11Q4

11Q3

11Q2

CFOs less defensive

CFOs’ expectations for hiring, investment and discretionary spending are back to where they were in early 2011 when the world seemed set fair for recovery.

Incr

ease

Dec

reas

e

Chart 13. Outlook for capital expenditure, hiring and discretionary spendingNet % of CFOs who expect UK corporates’ capital expenditure, hiring and discretionary spending to increase over the next 12 months

Capital expenditure

Hiring

Discretionary spending

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

13Q2

13Q1

12Q4

12Q3

12Q2

12Q1

11Q4

11Q3

11Q2

11Q1

10Q4

10Q3

Growth beckons

The Deloitte Corporate Compass captures CFO thinking under four key metrics. All have improved in the last year.

Our special question this quarter assesses CFOs’ thinking on the tasks facing the new Governor of the Bank of England, Mark Carney. CFOs expressed strong support for the Bank’s performance on inflation, sterling and providing monetary stimulus to the economy.

Mr Carney also faces challenges. A majority of CFO’s rate the Bank’s performance on getting credit to the economy as inadequate or worse. And a clear majority do not believe that the Bank will be able to meet its mandate and keep inflation below its 2.0% target.

Q2 2013Q2 2012

Chart 14. Deloitte Corporate CompassCFOs’ assessment of UK corporates’ financing conditions, risk appetite, level of uncertainty faced by them and the extent to which they are pursuing expansionary strategies

Higher is betterImproving financing

conditions

Rising riskappetite

Lower uncertainty

Expanding the business 0

6

2

4

8

10

Growth beckons

Bank's performance: % saying good/very good

Providing an appropriate level of monetary stimulus to the economy through interest rates, quantitative easing, etc.

94%

Maintaining an appropriate exchange rate for sterling

85%

Controlling inflation 65%

Ensuring the flow of credit in the economy 48%

Easy money: % saying very/somewhat likely to cause following problems

Prolonged period of UK inflation running significantly above the Bank’s 2.0% target

85%

Bubble in UK residential property market 67%

Rise in the number of so-called zombie companies, those for whom interest payments make up a high proportion or all of their profits

56%

Further significant devaluation of sterling 45%

Chart 15. Assessing the Bank of Engfand’s performance and risks of easy money% of CFOs who think the Bank’s performance has been good or very good in managing the following issues (left) and % of CFOs who think that current ultra-loose monetary policy is likely to cause the following problems (right)

Growth beckons

The macroeconomic backdrop to the Deloitte CFO Survey Q2 2013The outlook for the US economy continued to improve with the labour market and housing showing signs of strength. Euro area data remained weak and activity in China and a number of other emerging markets softened. The UK’s economic outlook brightened with broad-based rises in housing activity and business confidence.

Aggressive monetary and fiscal stimulus in Japan led economists to revise up their Japanese growth forecasts. Financial markets became more volatile. Government bond yields rose sharply and markets brought forward their expectations for interest rate rises in the US and Europe. Equities fell from late May on fears that the US Federal Reserve would slow its programme of quantitative easing. The sell-off abated towards the end of the quarter.

CFO Survey: Economic and financial context

Economic and financial context

UK GDP growth: Actual and forecast (%)

UK expected to see weak recovery in 2013

Quarter-on-quartergrowth

Forecasts

Year-on-yeargrowth

Source: Office for National Statistics (ONS) consensus forecasts from The Economist and Deloitte calculations

-8

-6

-4

-2

0

2

4

6

2013201220112010200920082007


VIX Index – a measure of equity market volatility

Financial stress edged higher

in June

Source: ONS, consensus forecasts from The Economist and Deloitte calculations

Gre

ater

fina

ncia

l str

ess

0

10

20

30

40

50

60

70

80

90

2013201220112010200920082007

UK private and public sector job growth (thousands)

Source: ONS

Private sector hiring offsets public sector job losses

Private sector

-300

-200

-100

0

100

200

300

400

500

Q113

Q212

Q311

Q410

Q110

Q209

Q308

Q407

Q107

Public sector



UK annual CPI inflation (%)

UK inflation down from 2011 peak, still above 2.0% target

Source: ONS

0

1

2

3

4

5

6

7

8

9

121008060402009896949290

Two-chart summary of key survey messages

Risk appetite% of CFOs who think this is a good time to take greater risk onto their balance sheets

Risk appetiteat 6-year high

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

13Q1

12Q3

12Q1

11Q3

11Q1

10Q3

10Q1

09Q3

09Q1

08Q3

08Q1

07Q3

Two-chart summary of key survey messagesEx

pans

iona

ryD

efen

sive

Index of corporate expansion: International & UK-facing corporates

UK-facing companies mostexpansionary in 2 years

Difference between the arithmetic averages of the % of CFOs who rated expansionary and defensive strategies as a strong priority for their business in the next 12 months.

Expansionary and defensive strategies defined under Chart 1.

International

UK-facing

-30%

-20%

-10%

0%

10%

20%

30%

13Q2

13Q1

12Q4

12Q3

12Q2

12Q1

11Q4

11Q3

11Q2

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About the surveyThis is the 24th quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The 2013 second quarter survey took place between 14th and 28th June. 135 CFOs participated, including the CFOs of 37 FTSE 100 and 45 FTSE 250 companies. The rest were CFOs of other UK-listed companies, large private companies and UK subsidiaries of major companies listed overseas. The combined market value of the 92 UK-listed companies surveyed is £684 billion, or approximately 32% of the UK quoted equity market. The Deloitte CFO Survey is is the only survey of major corporate users of capital that gauges attitudes to valuations, risk and financing. To join our panel of CFO respondents and for additional copies of this report, please contact Tulaine Trimble on 020 7007 1684 or email [email protected]

Please visit www.deloitte.co.uk/cfosurvey for current and past copies of the survey, historical data and coverage of the survey in the media and elsewhere.