The Deloitte CFO Survey: 2014 Q1 results

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

Record risk appetite: Greater confidence about growth in the UK and euro area is supporting corporate investment.

This is the 27th quarterly survey of chief financial officers and group finance directors of major companies in the UK.

The Q1 2014 survey took place between 6th and 24th March.

126 CFOs participated, including the CFOs of 27 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 80 UK-listed companies surveyed is £570 billion, or approximately 26% 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.

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The Deloitte CFO Survey: 2014 Q1 results

  1. 1. Risk appetite among the Chief Financial Officers of the UK’s largest companies rose to a six-and-a-half-year high in the first quarter of 2014. 71% of CFOs say now is a good time to take risk onto their balance sheet, more than twice the level of a year ago and higher than the levels prevailing before the onset of the financial crisis in late 2007. Significantly reduced economic uncertainty and much improved financing conditions have helped drive corporate risk appetite higher. Our economic and financial uncertainty index has fallen by one-third over the last year. Easy monetary policy and favourable financing conditions have created a capital- rich environment for big UK corporates. Buoyant risk appetite means that CFOs are likely to draw down on that capital. CFOs report that credit is more available, and more keenly priced, than at any time in the last six- and-a-half years. Expectations for equity issuance and bank borrowing have seen a strong recovery since the lows in late 2011. The default position of large corporates in the past six years – bullish on emerging markets, cautious on developed markets – seems to be reversing. Q1 2014 Record risk appetite The Deloitte CFO Survey April 2014
  2. 2. 0% 10% 20% 30% 40% 50% 60% 70% 80% 2014 Q1 2013 Q3 2013 Q1 2012 Q3 2012 Q1 2011 Q3 2011 Q1 2010 Q3 2010 Q1 2009 Q3 2009 Q1 2008 Q3 2008 Q1 2007 Q3 Chart 1. Risk appetite % of CFOs who think this is a good time to take greater risk onto their balance sheets The Deloitte CFO Survey
  3. 3. CFOs have become more confident about growth in developed economies, particularly the UK. CFOs increasingly see growth here in the UK, and established markets such as the US and euro area, as the key drivers of their corporate investment plans. Plans for all forms of corporate spending – hiring, capital spending and discretionary spending – are at new three-and-a-half-year highs. A record 95% of CFOs expect merger and acquisition activity to rise over the next year. ome markedly more confident about the outlook for UK inflation. Last quarter a majority expected inflation to overshoot significantly its 2.0% target in two years’ time. Most now expect inflation to be around 2.0%. On average CFOs expect interest rates to rise by 0.25% over the next year. Consumer spending has been a significant driver of the UK recovery so far. This quarter’s CFO Survey suggests that corporate spending will play an increasingly prominent role as the recovery matures. 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 To access current and past copies of the survey, historical data and media coverage, please visit: www.deloitte.co.uk/cfosurvey The Deloitte CFO Survey
  4. 4. Economists have become increasingly optimistic about the UK’s growth prospects. Among major advanced economies, the UK has seen the biggest upgrade to 2014 growth forecasts. 1.2 1.5 1.8 2.1 2.4 2.7 3.0 Mar- 14 Feb- 14 Jan- 14 Dec- 13 Nov- 13 Oct- 13 Sep- 13 Aug- 13 Jul- 13 Jun- 13 May- 13 Apr- 13 Mar- 13 Chart 2. Evolution of 2014 consensus growth forecasts for UK (% YoY) Source: The Economist Greater risk appetite
  5. 5. This is reflected in CFOs’ perceptions of uncertainty which have continued to fall. 52% of CFOs rate the level of economic and financial uncertainty facing their businesses as above normal, high or very high, down from 77% a year ago. 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 45% 55% 65% 75% 85% 95% 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 2011 Q4 2011 Q3 2011 Q2 2011 Q1 2010 Q4 2010 Q3 Greater risk appetite
  6. 6. CFO optimism has edged slightly lower this quarter but remains close to its highest level in four years. -70% -50% -30% -10% 10% 30% 50% 70% 2014 Q1 2013 Q3 2012 Q4 2012 Q1 2011 Q2 2010 Q3 2009 Q4 2009 Q1 2008 Q2 2007 Q3 LessoptimisticMoreoptimistic Chart 4. Business confidence Net % of CFOs who are more optimistic about financial prospects for their company now than three months ago Greater risk appetite
  7. 7. Financing conditions have continued to improve for the large corporates on our survey panel. CFOs report credit as being cheaper and more easily available than at any time in the last six-and-a-half years. -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 2014 Q1 2013 Q3 2013 Q1 2012 Q3 2012 Q1 2011 Q3 2011 Q1 2010 Q3 2010 Q1 2009 Q3 2009 Q1 2008 Q3 2008 Q1 2007 Q3 CreditischeapCreditiscostly CreditishardtogetCreditisavailable -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Cost of credit (LHS) Chart 5. Cost and availability of credit Net % of CFOs reporting credit is costly and credit is easily available Availability of credit (RHS) Easy finance
  8. 8. The balance of opinion among CFOs is that UK corporate balance sheets are underleveraged. -40% -20% 0% 20% 40% 60% 2014 Q1 2013 Q3 2013 Q1 2012 Q3 2012 Q1 2011 Q3 2011 Q1 2010 Q3 2010 Q1 2009 Q3 2009 Q1 2008 Q3 2008 Q1 2007 Q3 UnderleveragedOverleveraged Chart 6. Attitudes to leverage Net % of CFOs who think UK corporate balance sheets are overleveraged Easy finance
  9. 9. -35% -15% 5% 25% 45% 65% 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 2011 Q4 2011 Q3 2011 Q2 2011 Q1 2010 Q4 2010 Q3 Equity issuanceBank borrowing Bond issuance Chart 7. Outlook for bond issuance, bank borrowing and equity issuance Net % of CFOs who expect bond issuance, bank borrowing and equity issuance by UK corporates to increase over the next 12 months Easy finance This, along with easy financing conditions, has led to a sharp rise in CFO expectations of bank borrowing by UK corporates over the last year. CFOs are also very positive on increased equity issuance. For the first time in three years, a greater proportion of panellists expect equity issuance to rise in the next 12 months than those expecting a rise in bond issuance or bank borrowing.
  10. 10. 0% 10% 20% 30% 40% 50% Disposing of assets Reducing leverage Raising dividends or share buybacks Increasing capital expenditure Expanding by acquisition Reducing costs Increasing cash flow Introducing newproducts/ services or expanding into new markets 2014 Q1 Chart 8. 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 2013 Q1 38% 39% 34% 42% 23% 21% 15% 10% 18% 7% 7% 6% 13% 17% 35% 38% Focus on expansion The top priorities for CFOs are introducing new products/services or expanding into new markets and increasing cash flow. CFOs are placing greater emphasis on expansionary strategies such as expanding by acquisition and increasing capital expenditure than they did a year ago. They have also softened their focus on defensive strategies such as reducing costs and leverage.
  11. 11. 19% 21% 23% 25% 27% 29% 31% 33% 35% 37% 39% 2014 Q1 2013 Q3 2013 Q1 2012 Q3 2012 Q1 2011 Q3 2011 Q1 2010 Q3 Defensive strategies Chart 9. 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 flow. Expansionary strategies Compared to last quarter, corporate defensiveness has edged higher as CFOs keep a closer eye on cash. Yet, on balance, corporates continue to focus on expansion. Focus on expansion
  12. 12. CFO expectations for hiring, capital expenditure and discretionary spending have hit new three‑and‑a‑half‑year highs this quarter. This fits with the 8.7% year-on-year rise in business investment in the fourth quarter of last year. -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 2011 Q4 2011 Q3 2011 Q2 2011 Q1 2010 Q4 2010 Q3 DecreaseIncrease Capital expenditure Chart 10. Outlook for hiring, capital expenditure and discretionary spending Net % of CFOs who expect UK corporates’ hiring, capital expenditure and discretionary spending to increase over the next 12 months Hiring Discretionary spending Investment to rise
  13. 13. Chart 11 compares the effect of nine key factors on corporate investment plans between Q3 2014 and now. CFOs report that all these factors have had a more positive effect on their investment plans over the period. Uncertainty and fiscal consolidation remain the greatest constraints on investment although their dampening effects have weakened. The biggest improvements have come from prospects for growth in the UK and euro area. In fact, CFOs report that growth in the UK now offers greater support to their investment plans than growth in emerging markets. They also continue to be most optimistic on prospects for long‑term growth in demand for their products and services. Chart 11. Factors affecting corporate investment plans CFOs’ assessment of the effect of each of the following factors on their investment plans On a 10-point scale where 0 implies the most negative effect and 10 the most positive Q3 2013 Q1 2014 0 1 2 3 4 5 6 7 8 9 10 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 Availability of internal finance Cost and availability of external finance 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) Actual or expected levels of economic activity/GDP growth in the UK Secular or long-term growth for your products or services Investment to rise
  14. 14. CFOs report an improvement in prospects for economic activity across the developed world. They are especially positive on growth in the UK and US, which are forecast to be the fastest‑growing G7 nations this year. By contrast, prospects for growth in emerging economies have deteriorated. -60% -40% -20% 0% 20% 40% 60% 80% 100% Emerging markets and developing economies JapanEuro areaUSUK 95% 70% 54% 34% -52% Chart 12. Prospects for economic activity Net % 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 Improved UK growth prospects
  15. 15. A majority of CFOs expect the Bank of England’s base rate to be above its current level of 0.5% in a year’s time. The weighted‑average interest rate expected by our panel is 0.71% which amounts roughly to a 25-basis-point rise by the first quarter of next year. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1.25%1%0.75%0.50% 36% 43% 20% 1% Chart 13. Bank rate expectations % of CFOs who expect the Bank of England’s base rate to be at the following levels in a year’s time Improved UK growth prospects
  16. 16. With inflation down from last year’s peak of 2.9% in June to just 1.7% in February, CFOs have lowered their inflation expectations. Three‑quarters expect CPI inflation to hover around the Bank of England’s 2.0% target in two years’ time. Only a fifth of our panellists expect inflation to be significantly above target, down from a majority last quarter. Improved UK growth prospects 0% 10% 20% 30% 40% 50% 60% 70% 80% Above 3.5% 2.5%- 3.5% 1.5%- 2.5% 0- 1.5% Below zero 2% 48% 45% 75% 20% 0% 0% 0%5%5% Chart 14. Inflation expectations % of CFOs who expect consumer price inflation in the UK to be within the following ranges in two years’ time 2013 Q4 2014 Q1
  17. 17. The macroeconomic backdrop to the Deloitte CFO Survey Q1 2014 The underlying pace of growth in major advanced economies improved in the first quarter. UK data were particularly strong, with further upgrades to growth forecasts and inflation falling below the Bank of England’s 2.0% target for the first time in more than four years. The recovery in the euro area broadened, with some gains in the peripheral economies that bore the brunt of the euro crisis. Fears of deflation in the euro area led to the president of the German Bundesbank to soften his stance on further monetary easing in the region. Events in Crimea and further downgrades to emerging market growth forecasts added to concerns about emerging market economies. Equities were volatile. Developed markets saw the largest gains with emerging market and UK equities lagging behind. Appetite for deal-making rose, with a number of large transactions driving the value of global M&A activity up by 54% in Q1 on a year earlier, while global initial public offerings almost doubled in value. CFO Survey: Economic and financial context
  18. 18. Quarter-on-quarter growth Year-on-year growth 201520142013201220112010200920082007 -8 -6 -4 -2 0 2 4 6 Forecasts UK GDP growth: Actual and forecast (%) Source: ONS, consensus forecasts from The Economist and Deloitte calculations UK expected to grow by 2.8% in 2014 CFO Survey: Economic and financial context
  19. 19. CFO Survey: Economic and financial context Financial stress remains low 0 10 20 30 40 50 60 70 80 90 Greaterfinancialstress VIX Index – a measure of equity market volatility Source: Thomson Reuters Datastream 2007 2008 2009 2010 2011 2012 2013 2014
  20. 20. Private sector hiring offsets public sector job losses Public sector UK private and public sector job growth (thousands) Source: ONS Private sector -300 -200 -100 0 100 200 300 400 500 Q4 2013 Q1 2013 Q2 2012 Q3 2011 Q4 2010 Q1 2010 Q2 2009 Q3 2008 Q4 2007 Q1 2007 -300 -200 -100 0 100 200 300 400 500 CFO Survey: Economic and financial context
  21. 21. Inflation down to four-year low 0 1 2 3 4 5 6 7 8 9 UK annual CPI inflation (%) Source: ONS 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CFO Survey: Economic and financial context
  22. 22. Two-chart summary of key survey messages -60% -40% -20% 0% 20% 40% 60% 80% 100% Emerging markets and developing economies JapanEuro area USUK 95% 70% 54% 34% -52% Prospects for economic activity Net % 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 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 14 Q1 13 Q4 13 Q3 13 Q2 13 Q1 12 Q4 12 Q3 12 Q2 12 Q1 11 Q4 11 Q3 11 Q2 11 Q1 10 Q4 10 Q3 DecreaseIncrease Capital expenditure Outlook for hiring, capital expenditure and discretionary spending Net % of CFOs who expect UK corporates’ hiring, capital expenditure and discretionary spending to increase over the next 12 months Hiring Discretionary spending
  23. 23. 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. © 2014 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. 34050A About the survey This is the 27th quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The 2014 first quarter survey took place between 6th and 24th March. 126 CFOs participated, including the CFOs of 27 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 81 UK‑listed companies surveyed is £570 billion, or approximately 26% 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 ttrimble@deloitte.co.uk

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