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.TRANSCRIPT
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
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%10Q3
10Q4
11Q1
11Q2
11Q3
11Q4
12Q1
12Q2
12Q3
12Q4
13Q1
13Q2
23%
27%
The Deloitte CFO Survey
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.
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]
The Deloitte CFO Survey
Optimism rises
CFO optimism has risen for the fourth consecutive quarter and now runs above its long-term average.
Chart 2. Business confidenceNet % of CFOs who are more optimistic about financial prospects for their company now than three months ago
Less
opt
imis
tic
Mor
e op
tim
isti
c
-70%
-50%
-30%
-10%
10%
30%
50%
70%
12Q4
13Q2
12Q1
11Q2
10Q3
09Q4
09Q1
08Q2
07Q3
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%
13Q2
13Q1
12Q4
12Q3
12Q2
12Q1
11Q4
11Q3
11Q2
11Q1
10Q4
10Q3
Optimism rises
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-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
37%
26%
36%
27%
22%
18%
9%
0%
5%
10%
15%
20%
25%
30%
35%
40%
13Q2
13Q1
12Q4
12Q3
12Q2
12Q1
11Q4
Optimism rises
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 recessionProbability 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%
13Q2
13Q1
12Q4
12Q3
12Q2
12Q1
11Q4
11Q3
11Q2
11Q1
10Q4
10Q3
10Q2
10Q1
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%
13Q1
12Q3
12Q1
11Q3
11Q1
10Q3
10Q1
09Q3
09Q1
08Q3
08Q1
07Q3
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.
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
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.
Cre
dit
is c
ostl
yC
redi
t is
che
apC
redit is availableC
redit is hard to get
Chart 8. Cost and availability of creditNet % 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%
13Q1
12Q3
12Q1
11Q3
11Q1
10Q3
10Q1
09Q3
09Q1
08Q3
08Q1
07Q3
Easy financing conditions
Att
ract
ive
Una
ttra
ctiv
e
Chart 9. Favoured source of corporate fundingNet % of CFOs reporting the following sources of funding as attractive
Bond issuance
Bank borrowing
Equity issuance
-60%
-40%
-20%
0
20%
40%
60%
80%
07Q3
08Q1
08Q3
09Q1
09Q3
10Q1
10Q3
11Q1
11Q3
12Q1
12Q3
13Q1
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
Incr
ease
Dec
reas
e
Chart 10. Outlook for corporate revenues and marginsNet % 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
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 sharebuybacks
Increasing capitalexpenditure
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
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.
Expa
nsio
nary
Def
ensi
ve
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%
13Q2
13Q1
12Q4
12Q3
12Q2
12Q1
11Q4
11Q3
11Q2
CFOs less defensive
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.
Incr
ease
Dec
reas
e
Chart 13. Outlook for capital expenditure, hiring and discretionary spendingNet % 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%
13Q2
13Q1
12Q4
12Q3
12Q2
12Q1
11Q4
11Q3
11Q2
11Q1
10Q4
10Q3
Growth beckons
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 2013Q2 2012
Chart 14. Deloitte Corporate CompassCFOs’ 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 betterImproving financing
conditions
Rising riskappetite
Lower uncertainty
Expanding the business 0
6
2
4
8
10
Growth beckons
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
The macroeconomic backdrop to the Deloitte CFO Survey Q2 2013The 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
Economic and financial context
UK GDP growth: Actual and forecast (%)
UK expected to see weak recovery in 2013
Quarter-on-quartergrowth
Forecasts
Year-on-yeargrowth
Source: Office for National Statistics (ONS) consensus forecasts from The Economist and Deloitte calculations
-8
-6
-4
-2
0
2
4
6
2013201220112010200920082007
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
Gre
ater
fina
ncia
l str
ess
0
10
20
30
40
50
60
70
80
90
2013201220112010200920082007
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
Q113
Q212
Q311
Q410
Q110
Q209
Q308
Q407
Q107
Public sector
Economic and financial context
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
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 appetiteat 6-year high
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
13Q1
12Q3
12Q1
11Q3
11Q1
10Q3
10Q1
09Q3
09Q1
08Q3
08Q1
07Q3
Two-chart summary of key survey messagesEx
pans
iona
ryD
efen
sive
Index of corporate expansion: International & UK-facing corporates
UK-facing companies mostexpansionary 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%
13Q2
13Q1
12Q4
12Q3
12Q2
12Q1
11Q4
11Q3
11Q2
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About the surveyThis 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 [email protected]
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.