The Deloitte CFO Survey: 2013 Q3 results

A new mood of confidence pervades the third quarter CFO Survey. Chief Financial Officers see fewer risks in the global economy and greater opportunities for expansion. The defensive strategies of cost-cutting and cash accumulation that saw corporates through the global financial crisis are increasingly out of favour. The priority now is expansion. The balance-sheet cycle has turned decisively towards growth.

CFOs have become markedly more positive on prospects for growth in the developed world. There is greater confidence too, that the euro area will hold together. Emerging markets are a vital source of demand but CFOs are also looking to Europe for expansion.

In a reversal of the situation six months ago, CFOs believe that UK growth will have a more positive effect on their investment plans in the next year than growth in emerging markets or in the US, Japan and Asia-Pacific.

It is symptomatic of the changed attitude that a record 54% of CFOs say that now is a good time to take risk onto their balance sheet. High levels of corporate cash and favourable credit conditions suggest that major corporates have the firepower to invest.

Q3 2013

Priority: Expansion

The Deloitte CFO Survey

September 2013

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Defensive strategies

Expansionary strategies

Chart 1. CFO priorities: Expansionary vs. defensive strategies

Arithmetic average of the % of CFOs who rated expansionary and defensive strategies as a strong priority for their business in the next 12 months. Expansionary strategies are introducing new products/services or expanding into new markets, expanding by acquisition and increasing capital expenditure. Defensive strategies are reducing costs, reducing leverage and increasing cash ow.


The pressure on companies from institutional investors to do so is also mounting. Bank of America Merrill Lynch’s September fund managers’ survey found that 54% of investors want companies to cut cash levels and boost capital spending, an eight-year high. As BofA/ML notes, for institutional investors, “austerity is out, expansion is in”.

The mood among corporates has been transformed in the last year. This quarter’s survey reveals a broad-based optimism and a new focus on growth among the UK’s largest businesses.

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]

To access current and past copies of the survey, historical data and media coverage, please visit:

www.deloitte.co.uk/cfosurvey


CFO optimism has risen for the fifth consecutive quarter and is now running close to a three-year high.

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

Greater optimism

CFOs’ perceptions of economic uncertainty have continued to fall.

62% of CFOs report the level of financial and economic uncertainty facing their businesses is above normal, high or very high, down from 97% two years ago.

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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

Greater optimism

Fears of a euro break-up have also subsided. CFOs now assign an 8% probability to the euro area breaking up in the next 12 months, the lowest reading in two years.

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9% 8%

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

Greater optimism

Rising risk appetite

Greater optimism and lower uncertainty have contributed to an increased willingness among corporates to take risk.

A record 54% of CFOs say that now is a good time to take greater risk onto their balance sheets.

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Chart 5. Risk appetite% of CFOs who think this is a good time to taker greater risk onto their balance sheets

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10

Uncertainty about the economic and financial environment

Actual or expected levels of economic

activity/GDP growth in the euro area

Fiscal consolidation in the UK

(tax rises, cuts in public spending)

Actual or expectedlevels of economic

activity/GDP growthin the UK

Availability ofinternal finance

Cost and availabilityof external finance


activity/GDP growthin emerging markets


activity/GDP growthin the rest of theworld (includingthe US, Japan

and Asia-Pacific)

Secular or long-term growthfor your products or services

2013 Q3 – Effect over last 12 months

2013 Q3 – Effect over next 12 months

Chart 6. Factors affecting corporate investment plansCFOs’ assessment of the effect of each of the following factors ontheir investment plans:

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

Rising risk appetiteChart 6 shows CFOs’ assessment of how nine key factors have affected their investment plans in the last 12 months and how they are likely to do so in the next year.

CFOs think all these factors will offer greater support to investment over the next year. Uncertainty has been the greatest constraint on investment but CFOs expect its influence to weaken. CFOs also believe that growth in the UK and the euro area will exert a significantly more positive effect on investment over the next year. Indeed, in a striking change, UK growth is now seen as being more supportive of investment than growth in emerging markets.

CFOs remain most optimistic about prospects for long-term growth in demand for their own products and services.

Corporates turn expansionary

Disposing of assets

Reducing leverage

Raising dividends orshare buybacks

Increasing capital expenditure

Expanding by acquisition

Reducing costs

Increasing cash flow

Introducing new products/servicesor expanding into new markets

2013 Q3 2013 Q2

40%

40%

29%34%

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11%13%

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35%

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

For the first time in a year and a half CFOs have chosen an expansionary strategy – introducing new products and services or expanding into new markets – as their top priority.

They are also placing greater emphasis on increasing capital expenditure and have softened their focus on defensive strategies such as increasing cash flow, reducing costs and reducing leverage.

Expectations for capital expenditure, hiring and discretionary spending over the next 12 months, have hit three-year highs.

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reas

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Hiring

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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 next12 months

Corporates turn expansionary

CFOs are coming under growing pressure from institutional investors to increase investment. Bank of America Merrill Lynch’s September fund managers’ survey found that 54% of investors want companies to cut cash levels and boost capital spending, an eight-year high. This is a dramatic change from five years ago when investors wanted companies to repair their balance sheets.

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Repair balancesheet

Return cash to shareholders

Increase capex

28%

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Source: Bank of America Merril Lynch

2009

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70%

September 2013

Chart 9. What fund managers want companies to do with cash% of fund managers who would like companies to increase capital expenditure, return cash to their shareholders and repair their balance sheets

Investors seek capex

In the last six months CFOs have become more positive on the prospects for economic activity throughout the industrialised world. There has been a particularly strong improvement in sentiment about the UK and US economies. Expectations for emerging economies have, by contrast, deteriorated in the last six months.

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52% 48%

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Emerging markets anddeveloping economies

JapanEuro areaUSUK

Chart 10. Prospects for economic activityNet % of CFOs reporting an improvement in prospects for economic activity over the last six months in the UK, US, euro area, Japan and emerging markets


Under its new policy of forward guidance, the Bank of England has indicated that interest rates are likely to stay on hold until late 2016.

CFOs seem sceptical; most expect UK interest rates to rise by 2015.

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After 2016

2016

By 2015

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Chart 11. Rate rise expectations% of CFOs who expect the Bank of England’s Bank Rate to rise by 2015, in 2016 and after 2016


For the large companies in the CFO Survey credit conditions have improved continuously for more than a year.

CFOs now rate credit as being cheaper and more available than at any time in the last six years.

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Cost of credit (LHS)

Availability of credit (RHS)

Chart 12. Cost and availability of creditNet % of CFOs reporting credit is costly and credit is easily available

Easy credit

Bank borrowing has become significantly more attractive to CFOs in the last two years. CFOs rate bank borrowing and bond issuance as being equally attractive.

Equity issuance has moved back into favour as a source of funding for the first time in four years.

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Chart 13. Favoured source of corporate fundingNet % of CFOs reporting the following sources of funding as attractive

Easy credit

CFOs see benefits from UK membership of the European Union in all but one of the seven areas covered in this quarter’s special question.

The exception is the EU’s legal, regulatory and compliance framework where CFOs are, on balance, fairly negative.

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The legal, regulatory andcompliance framework

The success of UK financial services

UK influence in and connections withthe rest of the world

The free movement of people

Attracting foreign direct investment

Facilitating corrections with othereuro area nations

UK export performance

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Chart 14. Benefits of European Union membershipNet % of CFOs who rate the following as benefits to UK business and the UK economy of European Union membership

Easy credit

The macroeconomic backdrop to the Deloitte CFO Survey Q1 2013Western equity markets continued to climb in the third quarter and government bond yields edged higher. Economists’ forecasts for GDP growth in the industrialised world rose. The euro area emerged from recession and the UK posted stronger than expected growth in the second quarter.

The outlook for emerging market economies softened, with a number suffering capital outflows and a weakening of their currencies. Under its new policy of forward guidance the Bank of England indicated that UK interest rates are likely to stay on hold until late 2016. The US Federal Reserve surprised markets in mid September by announcing it is not yet ready to slow the pace of Quantitative Easing.

CFO Survey: Economic and financial context

UK expected to grow by 1.9% in 2014

Quarter-on-quartergrowth

Year-on-yeargrowth

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Forecasts

UK GDP growth: Actual and forecast (%)

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



VIX Index – a measure of equity market volatility

Financial stress edged lower in the third quarter

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Private sector hiring offsetspublic sector job losses

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Source: ONS

Private sector


UK annual CPI inflation (%)

UK inflation steady, remains above 2% target

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Source: ONS


Two-chart summary of key survey messages

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

Uncertainty at3-year low

Two-chart summary of key survey messages

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

Risk appetiteat 6-year high

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About the surveyThis is the 25th quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The 2013 third quarter survey took place between 6th and 23th September. 116 CFOs participated, including the CFOs of 28 FTSE 100 and 42 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 81 UK‑listed companies surveyed is £554 billion, or approximately 27% 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 Tulaine Trimble on 020 7007 1684 or email [email protected]

Economy & Finance

The Deloitte CFO Survey: 2013 Q3 results