The Deloitte CFO Survey 2014 Q2 results - Policy change is biggest concern for CFOs

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

Policy change has emerged as the biggest concern for chief financial officers, ahead of economic uncertainty.

- Policy change is biggest concern for CFOs.
- Perceptions of economic and financial uncertainty have hit a four-year low.
- CFO appetite for risk remains high as corporates shift from balance sheet repair to growth.
- 51% of CFOs expect interest rates to be equal to or above 1.0% in a year’s time.

This is the 28th quarterly survey of chief financial officers and group finance directors of major companies in the UK.

The Q2 2014 survey took place between 6th and 23rd June.

112 CFOs participated, including the CFOs of 31 FTSE 100 and 37 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 68 UK-listed companies surveyed is £473 billion, or approximately 21% 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 Q2 results - Policy change is biggest concern for CFOs

  1. 1. Political risk has eclipsed worries about the economy as a concern for the Chief Financial Officers of the UK’s largest companies. CFOs rank next May’s general election and the possibility of a referendum on EU membership as greater risks for their businesses than higher interest rates, bubbles in housing or financial markets, or weakness in emerging markets or the euro area. Such views contrast with CFO beliefs that levels of economic and financial risk have fallen sharply in the last year and with lower readings on news-based measures of policy uncertainty. CFOs are increasingly shifting away from a focus on balance-sheet repair towards growth. Growth is the top balance-sheet priority for UK corporates and 65% of CFOs say now is a good time to take risk. Expectations for capital spending, hiring and discretionary spending have risen strongly in the last year. The weight CFOs attach to defensive strategies, including cost control, fell to a four-year low in the second quarter. This sort of positive sentiment is increasingly being reflected in the official data. Hiring by the private sector has risen by 3.2% in the last year and business investment has risen by 10.6%. In May corporate bank borrowing saw the first year-on-year increase in five years. Q2 2014 Political risk and corporate expansion The Deloitte CFO Survey July 2014
  2. 2. Chart 1. Risk to business posed by the following factors Weighted average ratings on a scale of 0 – 100 where 0 stands for no risk and 100 stands for the highest possible risk Scotland's referedum on independence on 18th September A bubble in housing and/or other real and financial assets and the risk of higher inflation Deflation and economic weakness in the euro area, and the possibility of a renewed euro crisis Weakness and or volatility in emerging markets The prospect of higher interest rates and a general tightening of monetary conditions in the UK and US A future UK referendum on membership of the European Union The May 2015 UK general election and the risk of policy change and uncertainty 55 50 46 45 44 39 38 The Deloitte CFO Survey
  3. 3. The message from the CFO Survey is that corporates are prioritising expansion over further strengthening of their balance sheets. Against a backdrop of easy credit and high risk appetite companies are upbeat on revenues and margins. Economic and financial risk has declined significantly in the last year. But with the general election less than a year away uncertainties around policy risk have moved centre stage. 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. CFO perceptions of economic uncertainty have continued to fall. 49% of CFOs now rate the level of financial and economic uncertainty facing their business as above normal, high or very high – the lowest reading in four years. Chart 2. 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 Q2 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 Declining uncertainty
  5. 5. This fits with the dramatic fall in uncertainty over economic policy during the last two years, as measured by this news-based index of uncertainty. Chart 3. Economic policy uncertainty News-based index of economic policy uncertainty Source: Policyuncertainty.com The Economic Policy Uncertainty index, developed by academics at Stanford University and the University of Chicago, measures the share of articles containing terms related to economic policy uncertainty in the overall UK newsflow 0 50 100 150 200 250 300 350 400 450 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Declining uncertainty
  6. 6. Fears of a euro break-up have also subsided. CFOs now assign a 7% probability to the euro area breaking up in the next 12 months – the lowest reading since the euro crisis began in 2011. Chart 4. Average probability of euro secession 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% 8% 10% 9% 7% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2014 Q2 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 2011 Q4 Declining uncertainty
  7. 7. The decline in economic and financial uncertainty has coincided with a surge in corporate appetite for risk. 65% of CFOs say that now is a good time to take risk, down only slightly from the record reading of 71% in the first quarter. 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 5. Risk appetite % of CFOs who think this is a good time to taker greater risk onto their balance sheets Profitability to rise
  8. 8. Corporates are also more optimistic about their profitability. CFO expectations of a rise in revenues and operating margins have hit four-year highs. -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 2014 Q2 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 Revenues Chart 6. Outlook for corporate revenues and margins Net % of CFOs who expect UK corporates’ revenues and margins to increase over the next 12 months Operating margins Profitability to rise
  9. 9. -70% -50% -30% -10% 10% 30% 50% 70% 2014 Q2 2013 Q3 2012 Q4 2012 Q1 2011 Q2 2010 Q3 2009 Q4 2009 Q1 2008 Q2 2007 Q3 LessoptimisticMoreoptimistic Chart 7. Business confidence Net % of CFOs who are more optimistic about financial prospects for their company now than three months ago CFO optimism has eased slightly in the second quarter but continues to run well above its long-term average. Profitability to rise
  10. 10. -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 2014 Q2 2013 Q4 2013 Q2 2012 Q4 2012 Q2 2011 Q4 2011 Q2 2010 Q4 2010 Q2 2009 Q4 2009 Q2 2008 Q4 2008 Q2 2007 Q4 CreditischeapCreditiscostly CreditishardtogetCreditisavailable -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Cost of credit (LHS) Chart 8. Cost and availability of credit Net % of CFOs reporting credit is costly and credit is easily available Availability of credit (RHS) Financing conditions remain benign for the large corporates on our survey panel. CFOs report that the cost of credit has fallen to a seven- year low in the second quarter while credit availability is close to the highest level in seven years. Easy credit
  11. 11. -4 -3 -2 -1 0 1 2 3 4 5 6 FinancialdeficitFinancialsurplus Chart 9. Financial balance of corporate sector Financial balance of UK private non-financial corporations as a % of GDP 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 In the aftermath of the financial crisis, corporates paid down debt, cut costs and held on to cash, realising a huge financial surplus. Reflecting greater confidence on the strength of their balance sheets, corporates have narrowed this surplus during the last two years. Easy credit
  12. 12. Bank lending to corporates rose by 1% in the year to May, the first increase in five years. The Bank of England’s Credit Conditions Survey reveals that mergers and acquisitions, investment into commercial real estate and capital expenditure have been major drivers of corporate demand for loans. -70% -50% -30% -10% 10% 30% 2014 Q2 2013 Q3 2012 Q4 2012 Q1 2011 Q2 2010 Q3 2009 Q4 2009 Q1 2008 Q2 2007 Q3 Capital expenditure Commercial real estate Source: Bank of England’s Credit Conditions Survey M&A Chart 10. Factors supporting demand for loans from corporates Net % of banks reporting each of the following factors as a contributor to changes in corporate demand for lending over the past three months (2Q moving average) Easy credit
  13. 13. The top priority for UK CFOs is introducing new products and services or expanding into new markets. Compared to a year ago, there has been a marked softening of their focus on defensive strategies such as reducing costs and increasing cash flow. CFOs are placing greater emphasis on expansionary strategies such as increasing capital expenditure and expanding by acquisition. 0% 10% 20% 30% 40% Reducing leverage Raising dividends or share buybacks Disposing of assets Increasing capital expenditure Expanding by acquisition Increasing cash flow Reducing costs Introducing new products/ services or expanding into new markets 2014 Q2 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 2013 Q2 34% 34% 26% 40% 25% 15% 14% 5% 10% 18% 9% 8% 12% 13% 21% 38% 26% Focus on expansion
  14. 14. Corporate defensiveness hit a four-year low in the second quarter of 2014. CFOs have rated expansioary balance-sheet strategies as a higher priority than defensive ones for the fourth consecutive quarter. 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 12. 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 Focus on expansion
  15. 15. CFO expectations for growth in discretionary spending have hit a four-year high. Expectations for growth in hiring and capital expenditure are close to their highest levels in four years. -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 2014 Q2 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 13. 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 on the rise
  16. 16. Official data shows that investment is outpacing GDP growth. Business investment has risen by 10.6% over the last year. -25 -20 -15 -10 -5 0 5 10 15 20 Business investment Chart 14. GDP growth and business investment UK GDP growth (% YoY) and growth in business investment (% YoY, 2Q moving average) GDP 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Investment on the rise
  17. 17. In his Mansion House speech on 12th June, the Governor of the Bank of England warned that UK interest rates could rise sooner than widely expected. CFOs have taken this message on board. On average our panel sees base rates rising to around the 0.9% mark in a year’s time, amounting to roughly two 25-basis-point rises by June 2015. 0% 10% 20% 30% 40% 50% 1.25%1%0.75%0.50% 43% 45% 20% 40% 75% 20% 36% 9% 1% 6% Chart 15. 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 2014 Q1 2014 Q12 Investment on the rise
  18. 18. The macroeconomic backdrop to the Deloitte CFO Survey Q2 2014 Global equity markets rose 4.2% in the second quarter and yields on US and German bonds fell. Growth forecasts for emerging economies edged lower on a mix of geopolitical, financial and economic concerns. The US economy shrank in the first quarter, although the effects of an unusually harsh winter and business inventory restocking appear to be temporary. Portugal exited its bailout programme and Greece successfully raised money in the markets but concerns about deflation and low growth prompted the European Central Bank to cut interest rates. In the UK, inflation softened and output rose by 3.1% in the year to Q1 2014, the strongest performance in the developed world. In his Mansion House speech the Governor of the Bank of England claimed that a rise in UK interest rates could “happen sooner than markets currently expect”, although Mr. Carney subsequently sought to play down expectations of an early rate rise. CFO Survey: Economic and financial context
  19. 19. 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 forecast to grow by 3% in 2014 CFO Survey: Economic and financial context
  20. 20. CFO Survey: Economic and financial context Financial stress on this measure at 7-year 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
  21. 21. Strong private-sector hiring 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
  22. 22. Inflation at 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
  23. 23. Two-chart summary of key survey messages 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 Q2 2013 Q3 2012 Q4 2012 Q1 2011 Q2 2010 Q3 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 2014 Q2 2013 Q3 2012 Q4 2012 Q1 2011 Q2 2010 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
  24. 24. 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. 36172A About the survey This is the 28th quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The 2014 second quarter survey took place between 6th and 23rd June. 112 CFOs participated, including the CFOs of 31 FTSE 100 and 37 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 68 UK-listed companies surveyed is £473 billion, or approximately 21% 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 Linda Elston on 020 7303 0526 or email lelston@deloitte.co.uk

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