The Deloitte CFO Survey: 2013 Q2 results

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Find out more at http://www.deloitte.co.uk/cfosurvey

The second quarter's Deloitte CFO Survey, published on 9th July 2013, shows a sharp rise in risk appetite at the top end of the corporate sector and a shift towards expansionary strategies.

The Deloitte CFO Survey, launched in 2007, is a quarterly survey of Chief Financial Officers and Group Finance Directors of major UK companies. Over 300 CFOs, mainly from FTSE 350 companies, have joined the CFO Survey panel. The Survey captures shifts in UK CFOs' opinions on valuations, risks and financing and has become a benchmark for gauging financial attitudes of major corporate users of capital.

The Deloitte CFO Survey has been widely quoted in the media and is firmly established with policymakers. The Bank of England has cited the CFO Survey several times in its publications such as the quarterly Inflation Report and the monthly Trends in Lending report. The findings have also been quoted in the minutes of the Bank's Monetary Policy Committee meetings.

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The Deloitte CFO Survey: 2013 Q2 results

  1. 1. 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
  2. 2. 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% 10 Q3 10 Q4 11 Q1 11 Q2 11 Q3 11 Q4 12 Q1 12 Q2 12 Q3 12 Q4 13 Q1 13 Q2 23% 27% The Deloitte CFO Survey
  3. 3. 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. Authors Ian Stewart Chief Economist 020 7007 9386 istewart@deloitte.co.uk Debapratim De Senior Economic Analyst 020 7303 0888 dde@deloitte.co.uk Alex Cole Economic Analyst 020 7007 2947 alecole@deloitte.co.uk Contacts Ian Stewart Chief Economist 020 7007 9386 istewart@deloitte.co.uk Mark FitzPatrick Vice Chairman and CFO Programme Leader 020 7303 5167 mfitzpatrick@deloitte.co.uk The Deloitte CFO Survey
  4. 4. Optimism rises CFO optimism has risen for the fourth consecutive quarter and now runs above its long-term average. Chart 2. Business confidence Net % of CFOs who are more optimistic about financial prospects for their company now than three months ago LessoptimisticMoreoptimistic -70% -50% -30% -10% 10% 30% 50% 70% 12 Q4 13 Q2 12 Q1 11 Q2 10 Q3 09 Q4 09 Q1 08 Q2 07 Q3
  5. 5. 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% 13 Q2 13 Q1 12 Q4 12 Q3 12 Q2 12 Q1 11 Q4 11 Q3 11 Q2 11 Q1 10 Q4 10 Q3 Optimism rises
  6. 6. 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-up Probability 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% 13 Q2 13 Q1 12 Q4 12 Q3 12 Q2 12 Q1 11 Q4 Optimism rises
  7. 7. 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 recession Probability 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% 13 Q2 13 Q1 12 Q4 12 Q3 12 Q2 12 Q1 11 Q4 11 Q3 11 Q2 11 Q1 10 Q4 10 Q3 10 Q2 10 Q1
  8. 8. Rising risk appetite 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% 13 Q1 12 Q3 12 Q1 11 Q3 11 Q1 10 Q3 10 Q1 09 Q3 09 Q1 08 Q3 08 Q1 07 Q3 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.
  9. 9. 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. Rising risk appetite 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
  10. 10. 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. CreditiscostlyCreditischeap CreditisavailableCreditishardtoget Chart 8. Cost and availability of credit Net % 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% 13 Q1 12 Q3 12 Q1 11 Q3 11 Q1 10 Q3 10 Q1 09 Q3 09 Q1 08 Q3 08 Q1 07 Q3 Easy financing conditions
  11. 11. AttractiveUnattractive Chart 9. Favoured source of corporate funding Net % of CFOs reporting the following sources of funding as attractive Bond issuance Bank borrowing Equity issuance -60% -40% -20% 0 20% 40% 60% 80% 07 Q3 08 Q1 08 Q3 09 Q1 09 Q3 10 Q1 10 Q3 11 Q1 11 Q3 12 Q1 12 Q3 13 Q1 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. Easy financing conditions
  12. 12. IncreaseDecrease Chart 10. Outlook for corporate revenues and margins Net % 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. Easy financing conditions
  13. 13. 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 share buybacks Increasing capital expenditure 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
  14. 14. 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. ExpansionaryDefensive 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% 13 Q2 13 Q1 12 Q4 12 Q3 12 Q2 12 Q1 11 Q4 11 Q3 11 Q2 CFOs less defensive
  15. 15. 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. IncreaseDecrease Chart 13. Outlook for capital expenditure, hiring and discretionary spending Net % 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% 13 Q2 13 Q1 12 Q4 12 Q3 12 Q2 12 Q1 11 Q4 11 Q3 11 Q2 11 Q1 10 Q4 10 Q3 Growth beckons
  16. 16. 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 2013 Q2 2012 Chart 14. Deloitte Corporate Compass CFOs’ 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 better Improving financing conditions Rising risk appetite Lower uncertainty Expanding the business 0 6 2 4 8 10 Growth beckons
  17. 17. 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
  18. 18. The macroeconomic backdrop to the Deloitte CFO Survey Q2 2013 The 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
  19. 19. Economic and financial context UK GDP growth: Actual and forecast (%) UK expected to see weak recovery in 2013 Quarter-on-quarter growth Forecasts Year-on-year growth Source: Office for National Statistics (ONS) consensus forecasts from The Economist and Deloitte calculations -8 -6 -4 -2 0 2 4 6 2013201220112010200920082007
  20. 20. Economic and financial context VIX Index – a measure of equity market volatility Financial stress edged higher in June Source: ONS, consensus forecasts from The Economist and Deloitte calculations Greaterfinancialstress 0 10 20 30 40 50 60 70 80 90 2013201220112010200920082007
  21. 21. 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 Q1 13 Q2 12 Q3 11 Q4 10 Q1 10 Q2 09 Q3 08 Q4 07 Q1 07 Public sector Economic and financial context
  22. 22. Economic and financial context 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
  23. 23. 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 appetite at 6-year high 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 13 Q1 12 Q3 12 Q1 11 Q3 11 Q1 10 Q3 10 Q1 09 Q3 09 Q1 08 Q3 08 Q1 07 Q3
  24. 24. Two-chart summary of key survey messages ExpansionaryDefensive Index of corporate expansion: International & UK-facing corporates UK-facing companies most expansionary 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% 13 Q2 13 Q1 12 Q4 12 Q3 12 Q2 12 Q1 11 Q4 11 Q3 11 Q2
  25. 25. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. © 2013 Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198. Designed and produced by The Creative Studio at Deloitte, London. 28071A About the survey This 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 ttrimble@deloitte.co.uk 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.

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