The Deloitte CFO Survey: 2015 Q3

Q3 2015

October 2015

The Deloitte CFO Survey

AuthorsIan StewartChief Economist020 7007 [email protected]

Debapratim DeSenior Economic Analyst020 7303 [email protected]

Alex ColeEconomic Analyst020 7007 [email protected]

ContactsIan StewartChief Economist020 7007 [email protected]

Richard MuschampCFO Programme Leader020 7007 [email protected]

For current and past copies of the survey, historical data and coverage of the survey in the media and elsewhere, please visit:

www.deloitte.co.uk/cfosurvey

Uncertainty mountsCorporate risk appetite and sentiment have faded in the face of weakness in emerging economies and global equity markets. Chief Financial Officers’ perceptions of external financial and economic uncertainty have seen the sharpest rise in five years.

Moves in financial markets and risk appetite among CFOs are closely correlated. Both react to similar factors and financial markets directly influence corporates, for instance through the availability and pricing of capital. Equities sold off in the third quarter, with emerging markets seeing the largest outflow of capital since the financial crisis. With UK equities down 18% in the last three months there has been a parallel loss of risk appetite among the UK’s major corporates. The proportion of CFOs who think now is a good time to take risk has dropped to 46%, down from 59% in the second quarter and a peak of 72% a year ago. Rising risk aversion is feeding into a more defensive stance on the part of major corporates, with a greater focus on cost reduction and rather less on investment.

Despite the recent more emollient tone by Western central banks, CFOs see the prospect of tighter monetary policy in the UK and the US as the greatest risk facing their businesses.

From the Bank of England’s point of view this may be the worst of both worlds – a corporate sector which is worried both about the prospect of higher interest rates and slower global growth.

The slowdown in emerging markets now ranks joint second, together with concerns about euro area growth, on CFOs’ list of worries. Against a backdrop of flagging business confidence the recent moves by the Bank of England and the US Federal Reserve to signal that interest rates are likely to stay lower for longer look well judged.

The firms on the CFO Survey panel are large and have heavy overseas exposure, with more than half of their revenues coming from outside the UK. While external risks are centre stage, CFOs are positive on prospects for the UK economy. CFOs rate uncertainty and emerging market weakness as constraints on investment but see the state of the UK economy as being a significant support for investment.

The UK’s recovery from recession has been punctuated by a series of external shocks, of which weakness in emerging markets is the latest. A strong pound and weaker demand in emerging markets dim prospects of an export-led recovery - and put greater weight on domestic demand to drive UK growth.

Chart 1. Uncertainty% of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high

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mailto:[email protected]




Risk appetite down

Corporate risk appetite tends to follow moves in equity markets.

The third quarter saw a rise in investor risk aversion as they moved away from riskier assets and into safer government bonds.

This has fed through to a fall in risk appetite among CFOs. 46% of them say now is a good time to take greater risk onto balance sheets, down from 59% in the previous quarter.

Chart 2. Corporate and investor risk appetite% of CFOs who think this is a good time to take greater risk onto their balance sheets and the ratio of the price of UK equities to that of UK government bonds

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Equities vs Bonds (RHS) Risk appetite (LHS)

The fall in corporate risk appetite has also coincided with a rise in financial market volatility.

The VIX Index – a measure of volatility in equity markets, sometimes described as the ‘fear gauge’ – has risen sharply during the third quarter.

Chart 3. Financial market volatilityVIX Index – A measure of equity market volatility

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The global recovery from the financial crisis has been uneven. Since 2008, growth rates in emerging markets, and particularly China, have far exceeded those of Western economies.

However, the outlook for growth in Europe, the UK and the US is now looking more positive, as their economies accelerate, while Chinese growth slows in the coming years.

Chart 4. Growth prospectsAnnual average GDP growth rates for 2008-14 and forecasts for 2015-16 (% YoY)

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2 | CFO Survey Q3 2015 Uncertainty mounts

Rate rise biggest risk to business

Consumer confidence and business sentiment, which tend to move in the same direction, have diverged lately.

The large UK corporates on our survey panel are more exposed than consumers to weakness in emerging markets.

While consumer confidence is near a 15-year high in the UK, reflecting low inflation and rising wages, CFOs are far less optimistic about the financial prospects of their companies.

Chart 5. Business and confidenceNet % of CFOs who are more optimistic about financial prospects for their company now than three months ago

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Business confidence (LHS)

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Despite the recent more emollient tone by Western central banks, CFOs see the prospect of tighter monetary policy in the UK and the US as the greatest risk facing their businesses.

Concerns over weakness and volatility in emerging markets have also risen sharply in the third quarter, and CFOs now rate it as the second biggest risk to their businesses.

By contrast, concerns over the UK economy such as weak productivity, planned cuts in public spending, and the risk of asset price bubbles are at the bottom of CFOs’ worry list.

Chart 6. Risk to business posed by the following factorsWeighted average ratings on a scale of 0 - 100 where 0 stands for no risk and 100 stands for the highest possible risk

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Poor productivity/weak competitiveness in the UK economy

Planned cuts in UK public expenditure in this parliament

A bubble in housing and/or other real and financial assets and the

risk of higher inflation

The UK referendum on membership of the EU

Weak demand in the UK

Deflation and economic weakness in the euro area, and the possibility

of a renewed euro crisis

Weakness and/or volatility in emerging markets and rising geopolitical risks

in Middle East/Ukraine

The prospect of higher interest rates and a general tightening of monetary

conditions in the UK and US

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CFO Survey Q3 2015 Uncertainty mounts | 3

Sharper focus on defensive strategies

Introducing new products and services or expanding into new markets – an expansionary strategy – remains the top priority for CFOs.

However, they have sharpened their focus on defensive strategies such as reducing costs and increasing cash flow.

They are also placing less emphasis on expanding by acquisition or increasing capital expenditure.

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Chart 7. 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

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Raising dividends or share buybacks

Disposing of assets

Reducing leverage

Increasing capital expenditure

Expanding by acquisition

Reducing costs

Increasing cash flow

Introducing new products/servicesor expanding into new markets

CFOs have scaled down their expectations for growth in hiring, capital expenditure and discretionary spending by UK corporates.

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Chart 8. 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


Uncertainty weighing on investment plans

Chart 9 compares the effect of nine key factors on corporate investment plans between Q3 2014 and now. The further the coloured lines in the chart are from the centre, the more the factor acts to support investment. Readings below five indicate that the factor acts as a depressant on investment.

Uncertainty continues to be the greatest constraint on investment plans.

Fiscal consolidation in the UK and weakness in emerging markets are the next biggest depressants. CFOs are particularly concerned about the slowdown in China. In response to another question, 60% of them said that it will have modest to significant negative effects on their business over the next 12 months.

Easy access to external funding, the state of the UK economy and rising demand for businesses’ products and services remain the main drivers of investment.

CFOs’ assessment of the effect of each of the following factors on their investment plans:Chart 9. Factors affecting corporate investment plans

On a 10-point scale where 0 implies the most negative effect and 10 the most positive

2014 Q3 - Effect over last 12 months2015 Q3 - Effect over last 12 months

Uncertainty about the economic and financial environment

Fiscal consolidation in the UK (tax rises, cuts in public spending)

Actual or expected levels of economic activity/GDP growth in the euro area

Actual or expected levels of economic activity/GDP growth in emerging markets

Actual or expected levels of economic activity/GDP growth in the rest of the world (including the US, Japan and Asia-Pacific)

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Financing conditions benign

The large corporates on our survey panel continue to have easy access to credit. The cost of credit remains close to its lowest level in eight years while credit availability is just shy of an eight-year high.

CFOs also rate debt finance – bank borrowing and bond issuance – as the most attractive source of external funding.

Chart 10. Cost and availability of creditNet % of CFOs reporting credit is costly and credit is easily available

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A majority of CFOs expect inflation to hover around the Bank of England’s 2.0% target in two years’ time.

However, a growing proportion anticipate considerably lower inflation, with almost 40% expecting it to be between 0 and 1.5%.

Chart 11. Inflation expectations% of CFOs who expect consumer price inflation in the UK to lie between the following ranges in two years’ time

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Markets have responded to recent communications from the US Federal Reserve and the Bank of England by pushing back their expectations for the timing of rate rises.

Over the third quarter, futures traders significantly lowered their interest rate expectations for the end of next year.

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Chart 12. Interest rate expectationsMarket expectations for 90-day sterling LIBOR in December 2016 (%)


CFO Survey: Economic and financial context

The macroeconomic backdrop to the Deloitte CFO Survey Q3 2015The UK and US economies saw steady groth in the third quarter, with consumers benefiting from low inflation and rising wages. However, a number of industrial indicators pointed to a softening of activity in the West, with slowing growth in key emerging markets acting as a drag on output. Slowing activity in the Chinese economy caused particular concern, resulting in a sell-off in Chinese equities. Weakness in China and falling commodity prices dented confidence in other key emerging markets, whose currencies fell sharply against the US dollar. The Institute of International Finance estimates that emerging markets saw more than $40bn of capital outflows between July and September, the largest reversal since the height of the global financial crisis. With investors increasingly unsettled, global stock markets lost more than $10tn in value, their worst quarterly performance since 2011. Yields on developed market bonds rose. Against this backdrop, and with inflation remaining low, central banks opted to keep monetary policy accommodative. The US Federal Reserve opted to keep rates on hold, the Bank of England moved to dampen expectations of an imminent rate rise in the UK and the ECB opened the door for further quantitative easing in the euro area.

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The FTSE 100sold-off in Q3

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Two-chart summary of key survey messages

About the surveyThis is the 33rd quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The 2015 third quarter survey took place between 9th and 28th September. 122 CFOs participated, including the CFOs of 23 FTSE 100 and 56 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 80 UK-listed companies surveyed is £393 billion, or approximately 19% of the UK quoted equity market. The Deloitte CFO Survey 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 Anthea Neagle on 020 7303 0116 or email [email protected].

Business and consumer confidenceNet % of CFOs who are more optimistic about financial prospects for their company now than three months ago and the GfK consumer confidence index

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Business confidence (LHS)

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Corporate and investor risk appetite% of CFOs who think this is a good time to take greater risk onto their balance sheets and the ratio of the price of UK equities to that of UK government bonds

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Equities vs Bonds (RHS) Risk appetite (LHS)
