Support among the Chief Financial
Officers of the UK’s largest corporates for staying in the EU has narrowed, mirroring a drift towards greater scepticism on the part of the UK public in the second half of 2015. A clear majority of CFOs continue to favour remaining in the EU, but those expressing unqualified support for membership fell from 74% in the second quarter to 62% in the fourth quarter. Just 6% of CFOs favour leaving. But 4% did not express an opinion, and a sizeable minority, 28%, say their decision will depend on the results of the Prime Minister’s renegotiation of the UK’s membership of the EU. The outcome of these discussions is likely to emerge following the European Council meeting in February. With almost a third, or 32%, of CFOs undecided or undeclared, an eventual deal could significantly affect business attitudes to EU membership. UK CFOs are downbeat about the outlook for growth in the euro area in 2016 despite a stronger than expected acceleration in activity seen in the region in 2015. Indeed, CFOs are more pessimistic about prospects for the euro area this year than for emerging market economies. CFO sentiment is most positive on the US and the UK economies. Nonetheless, doubts about the pace and sustainability of the global recovery are weighing on business sentiment. CFO confidence fell through 2015 and ended the year at its lowest level since the second quarter of 2012, when the euro area was in recession. Q4 2015 The year ahead: A cautious start to 2016 The Deloitte CFO Survey January 2016

The Deloitte CFO Survey Chart
1. CFO attitudes to EU membership % of CFOs who gave the following responses when asked whether it is in the interests of UK businesses for the UK to remain a member of the EU 0% 10% 20% 30% 40% 50% 60% 70% 80% Don't know, no strong opinion, prefer not to say Too early to say: Depends on results of renegotiation NoYes 2015 Q2 2015 Q4 74% 62% 2% 6% 23% 28% 1% 4%

Corporate risk appetite often reflects
trends in financial markets. Thus the decline in the FTSE100 UK equity index since last summer has been accompanied by a softening in corporate risk appetite. The proportion of CFOs who think now is a good time to take risk dropped to 37% in the fourth quarter, down from 47% in the third quarter and a peak of 72% in late 2014. Such large moves in risk appetite feed through to the way in which companies run their finances. CFOs’ balance sheet strategies have become more defensive, with a sharper focus on cost control which now tops CFOs’ list of priorities. Meanwhile CFOs are placing less weight on growth through acquisitions and on capital spending. In recent months uncertainties, especially in emerging markets, have prompted the Bank of England to push back the timing of UK interest rate rises. The consensus in financial markets in mid-December was that the Bank will start raising interest rates in the second half of 2016. The Deloitte CFO Survey The pace of tightening is expected to be gentle, with three-month interest rates rising by a total of about 100bp, from a current 0.6% to 1.6% at the end of 2018. The corporate sector seems well positioned to cope with this sort of trajectory with 64% of CFOs reporting that a 100bp rate rise would have no effect, or a positive effect, on their plans for investment or employment. The surge in CFO confidence and risk appetite that started in late 2012 went into reverse in 2015. CFOs are upbeat about prospects for the US and UK economies, but see more risks elsewhere, especially in emerging markets and the euro area. CFOs have reacted by cutting back on risk-taking and sharpening their focus on cost control. This more defensive stance by the corporate sector points to slower growth in corporate hiring and capital expenditure in coming months.

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 Richard Muschamp CFO Programme Leader 020 7007 0724 rmuschamp@deloitte.co.uk 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 The Deloitte CFO Survey

Public support for the UK’s
membership of the EU fell in the second half of 2015. Between the end of May and the beginning of July four major opinion polls gave the ‘In’ camp an average lead of 18 percentage points. In the fourth quarter the same four polls showed the lead had been reduced to six percentage points. This decline in public support for the EU has coincided with a narrowing in support among CFOs. Europe Chart 2. UK public opinion polls on EU membership Mid-year polling (May to July) In Out Don’t Know Lead (In) ICM 31 May 47% 33% 20% +14 Ipsos Mori 14-16 Jun 66% 22% 12% +44 YouGov 19-24 Jun 44% 38% 18% +6 Survation 29 Jun-6 Jul 45% 37% 18% +8 Average 51% 33% 17% +18 End-year polling (October to December) Ipsos Mori 17-19 Oct 52% 36% 12% +16 Survation 16-17 Nov 43% 40% 18% +3 YouGov 19-24 Nov 40% 38% 22% +2 ICM 6 Dec 43% 39% 17% +4 Average 45% 38% 17% +6

CFOs are positive about prospects
for growth in the US and the UK in 2016. But CFOs are strikingly downbeat about the euro area. Levels of pessimism about euro area growth in 2016 are greater than for emerging markets’ growth. Chart 3. Growth prospects Net % of CFOs who are optimistic about prospects for growth in the following regions in 2016 -40% -20% 0% 20% 40% 60% 80% 100% USUKChinaJapanEmerging markets including China* Euro areaEmerging markets excluding China* -25% -18% -27% -6% 68% 82% -5% *GDP-weighted estimate based on CFO readings for emerging markets excluding China, and for China Europe

Although CFOs are negative about
prospects for the euro area, activity in the region picked up through 2015, and at a rather faster rate than expected. German business confidence ended 2015 at higher levels than at the beginning of the year. Meanwhile US manufacturing activity dropped to a six-and-a-half year low in November. Europe Chart 4. German and US business confidence German Ifo Business Climate Index and US ISM Purchasing Managers Index (Manufacturing) 80 85 90 95 100 105 110 115 120 Dec 15 Dec 14 Dec 13 Dec 12 Dec 11 Dec 10 Dec 09 Dec 08 Dec 07 Dec 06 Dec 05 US ISM (RHS) German IFO (LHS) 30 35 40 45 50 55 60 65

Other than a brief, post-election
bounce, corporate risk appetite has been trending down for over a year. Just 37% of CFOs say that now is a good time to take greater risk onto their balance sheets, down from a peak of 72% in Q3 2014. Risk appetite wanes Chart 5. Risk appetite % of CFOs who think this is a good time to take greater risk onto their balance sheets 0% 10% 20% 30% 40% 50% 60% 70% 80% 15 Q3 15 Q1 14 Q3 14 Q1 13 Q3 13 Q1 12 Q3 12 Q1 11 Q3 11 Q1 10 Q3 10 Q1 09 Q3 09 Q1 08 Q3 08 Q1 2007 Q3

The fall in corporate risk
appetite has been mirrored by a decline in investor risk appetite. The second half of 2015 saw a rise in risk aversion among investors, as they moved from riskier assets including equities into safer government bonds. Risk appetite wanes Chart 6. CFO and investor risk appetites % of CFOs who think this is a good time to take greater risk onto their balance sheets (LHS) and change in UK equities over bonds (RHS) 30 35 40 45 50 55 60 65 70 75 Sep 15 Jan 15 Sep 11 Sep 13 Jan 11 Sep 09 Jan 09 May 08 Sep 07 Jan 07 % CFOs saying now is a good time to take risk (RHS) Equities vs bonds (LHS) 0 10 20 30 40 50 60 70 80 Jan 13 May 12 Mar 10 Mar 14

Sentiment among large corporates has
declined for the third consecutive quarter. CFO optimism is at its lowest level since the second quarter of 2012, when the euro area was in recession and gripped by concerns that the single currency might break up. Risk appetite wanes -80% -60% -40% -20% 0% 20% 40% 60% MoreoptimisticLessoptimistic Chart 7. Business confidence Net % of CFOs who are more optimistic about financial prospects for their company now than three months ago 15 Q4 15 Q1 14 Q4 14 Q1 13 Q4 13 Q1 12 Q4 12 Q1 11 Q4 11 Q1 10 Q4 10 Q1 09 Q4 09 Q1 08 Q4 08 Q1 07 Q4 2007 Q3

For the first time in
a year CFOs rate cost reduction as their number one priority for the next 12 months. CFOs are also placing greater emphasis on other defensive strategies such as increasing cash flow, disposing of assets and reducing leverage. In contrast, CFOs are placing rather less emphasis on growth strategies such as introducing new products and services, expanding by acquisition and increasing capital expenditure. 0% 10% 20% 30% 40% 50% Reducing leverage Disposing of assets Raising dividends or share buybacks Increasing capital expenditure Expanding by acquisition Increasing cash flow Introducing new products/ services or expanding into new markets Reducing costs 2015 Q32015 Q4 44% 34% 38% 39% 37% 34% 19% 17% 22% 19% 14% 8% 13% 9% 12% 10% 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 Focus on cost control

The increased focus on defensive
strategies means that CFOs are more defensive than at any time in the last three years. 19% 21% 23% 25% 27% 29% 31% 33% 35% 37% 39% Chart 9. CFO priorities: Expansionary vs. defensive strategies Defensive strategies Expansionary strategies 2015 Q4 2015 Q1 2014 Q4 2014 Q1 2013 Q4 2013 Q1 2012 Q4 2012 Q1 2011 Q4 2011 Q1 2010 Q3 Focus on cost control 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.

Inflation and interest rates CFOs’
expectations for inflation fell between the third and fourth quarters of 2015. A narrow majority (51%) now expect inflation to remain below 1.5% in two-years’ time. The fall in CFOs’ expectations for inflation coincided with downgrades to both market and Bank of England forecasts for inflation in 2016. Chart 10. CFO inflation expectations % of CFOs who expect consumer price inflation in the UK to lie between the following ranges in two-years’ time 0% 10% 20% 30% 40% 50% 60% Above 2.5%1.6%-2.5%0-1.5%Below zero 2015 Q3 2015 Q4 39% 1% 51% 5% 4% 56% 44%

Inflation and interest rates As
inflation forecasts have fallen so, too, have financial market expectations for future interest rates. Expectations for UK interest rates at the end of 2016, 2017 and 2018 are now lower than they were in the summer of 2015. 0.0 0.5 1.0 1.5 2.0 2.5 Chart 11. Financial market expectations for UK interest rates UK market rate expectations for end-year three-month interest rates at Dec ’18 1.6% at Dec ’17 1.3% at Dec ’16 0.9% Now 0.6% Dec 15 Nov 15 Oct 15 Sep 15 Aug 15 Jul 15 Jun 15

Inflation and interest rates The
corporate sector seems fairly well positioned to cope with the cumulative 100bp rate rise priced in by financial markets in the next three years. Almost two-thirds of CFOs say that interest rates would have to rise by more than 100 basis points before their businesses cut planned investment or employment. Chart 12. Effect of rate rises on corporate spending % of CFOs reporting that the Bank of England’s base rate could rise by the following amounts before their business responds by cutting planned investment or employment 0% 5% 10% 15% 20% 25% 30% A rise in interest rates would be good for my business More than 300 basis points 300 basis points 200 basis points 100 basis points 50 basis points 25 basis points 8% 2% 26% 21% 10% 24% 10% 36% say rate rises of ≤100bp would affect investment/jobs 64% say rates would have to rise by >100bp to affect investment/ jobs

Weaker margins Expectations for revenue
and margin growth dipped in the second half of 2015. While a majority of CFOs still expect UK corporate revenues to increase over the next 12 months, the outlook for revenues and margins is at its weakest for two-and-a-half years. -70% -50% -30% -10% 10% 30% 50% 70% 90% 15 Q4 15 Q3 15 Q2 15 Q1 14 Q4 14 Q3 14 Q2 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 2010 Q3 IncreaseDecrease Chart 13. 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

Weaker margins Our panel of
large corporates continues to enjoy good access to credit. The cost of credit is not far off its lowest reported levels, while credit availability is near to all-time highs. -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% CreditiscostlyCreditischeap CreditiscostlyCreditischeap Chart 14. Cost and availability of credit Net % of CFOs reporting credit is costly and credit is easily available -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 15 Q4 15 Q1 14 Q4 14 Q1 13 Q4 13 Q1 12 Q4 12 Q1 11 Q4 11 Q1 10 Q4 10 Q1 09 Q4 09 Q1 08 Q4 08 Q1 07 Q4 2007 Q3 Cost of credit (LHS) Availability of credit (RHS)

Weaker margins Bank borrowing remains
the most attractive source of funding for CFOs, with a significant majority (86%) viewing it as an attractive source of external funding. As has been the case for the last five years, CFOs view equity issuance as a less attractive source of funding than bond issuance or bank borrowing. -60% -40% -20% 0% 20% 40% 60% 80% 100% AttractiveUnattractive Chart 15. Favoured source of corporate funding Net % of CFOs reporting the following sources of funding as attractive Bank borrowing Equity issuance Bond issuance 15 Q4 15 Q1 14 Q4 14 Q1 13 Q4 13 Q1 12 Q4 12 Q1 11 Q4 11 Q1 10 Q4 10 Q1 09 Q4 09 Q1 08 Q4 08 Q1 07 Q4 2007 Q3

The macroeconomic backdrop to the
Deloitte CFO Survey Q4 2015 The International Monetary Fund cut its forecast for global growth in 2015 and 2016. Activity in emerging markets continued to disappoint, with economists nudging down their forecasts for growth in most emerging economies. Growth in the advanced economies continued and broadened, though indicators of industrial activity have generally softened, partly as a result of weaker export market demand. After a short-lived market rally in October, equities, especially those in emerging markets, lost value towards the end of the year. In early December the oil price fell below $40, to the lowest level in seven years; metals prices also softened. Inflation remained close to zero in the US, the euro area and the UK and inflation forecasts for 2016 continued to decline. The European Central Bank’s announcement of a further round of Quantitative Easing fell short of market expectations, though the ECB’s President subsequently reassured markets that there were “no limits” to the tools the ECB could use to fight deflation. As widely anticipated the US Federal Reserve raised interest rates on 16th December, the first time US interest rates have been increased in almost ten years. CFO Survey: Economic and financial context

CFO Survey: Economic and financial
context -7% -5% -3% -1% 1% 3% 5% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 UK GDP growth: Actual and forecast (%) Quarter-on- quarter growth Year-on-year growth Source: ONS, consensus forecasts from The Economist and Deloitte calculations Forecasts

CFO Survey: Economic and financial
context Source: Thomson Reuters Datastream 3000 3500 4000 4500 5000 5500 6000 6500 7000 2008 2009 2010 2011 2012 2013 2014 2015 FTSE 100 price index

Public Source: Thomson Reuters Datastream
Private Q2 2015 Q3 2014 Q4 2013 Q4 2012 Q4 2011 Q4 2010 Q4 2009 Q4 2008 Q4 2007 Q1 2007 -400 -300 -200 -100 0 100 200 300 400 500 600 UK private and public sector job growth (thousands) CFO Survey: Economic and financial context

CFO Survey: Economic and financial
context Source: Thomson Reuters Datastream 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 -1 0 1 2 3 4 5 6 7 8 9 UK annual CPI inflation (%)

Two-chart summary of key survey
messages CFO attitudes to EU membership % of CFOs who gave the following responses when asked whether it is in the interests of UK businesses for the UK to remain a member of the EU 0% 10% 20% 30% 40% 50% 60% 70% 80% Don’t know, no strong opinion, prefer not to say Too early to say: Depends on results of renegotiation NoYes 2015 Q2 2015 Q4 74% 62% 2% 6% 23% 28% 1% 4% 19% 21% 23% 25% 27% 29% 31% 33% 35% 37% 39% CFO priorities: Expansionary vs. defensive strategies Defensive strategies Expansionary strategies 15 Q4 15 Q1 14 Q4 14 Q1 13 Q4 13 Q1 12 Q4 12 Q1 11 Q4 11 Q1 10 Q3

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