EU's legal, regulatory and compliance framework. ... messages coming from the Bank ..... The Bank of England cut its gro
Q1 2016
The Deloitte CFO Survey Brexit tops risk list This quarter’s CFO Survey is the first to be conducted since the announcement that the UK’s EU membership referendum will take place on 23rd June. It shows a marked rise in support for the EU among Chief Financial Officers. 75% of CFOs say they believe it is in the interests of UK business for the UK to remain in the EU, up from 62% in the fourth quarter of 2015. 8% of CFOs favour leaving the EU, up from 6%. The EU scores high marks with CFOs for its beneficial effects on UK exports, inward investment and financial services. At the opposite end of the scale only 15% of CFOs think UK business and the UK economy benefit from the EU’s legal, regulatory and compliance framework. The dominant concern for CFOs is the forthcoming EU referendum. It tops the corporate worry list, eclipsing longstanding concerns about emerging markets and growth in the euro area. While CFOs see rising risks attached to the referendum, concerns around the other seven major macroeconomic categories of risk (see chart 4) have reduced or remained unchanged in the last three months.
Authors Growing concerns about Brexit seem to be behind a marked increase in CFO perceptions of financial and economic uncertainty. It now stands at levels last seen in early 2013, at the tail end of the euro crisis. Risk appetite has also suffered, with the proportion of CFOs saying that now is a good time to take risk dropping from 51% to 25% in the last year. With the storm clouds gathering CFOs have maintained a focus on reducing costs and increasing cash flow. Enthusiasm for expansion has taken a knock too. Corporates are pulling in their horns, with expectations for hiring and capital spending at three-year lows. Despite growing concerns about the forthcoming EU referendum, 53% of CFOs say they have not made, and are not in the process of making, contingency plans for a possible UK exit from the EU. 26% say they have made, or are making, such plans. It may be that the continued, albeit narrowing, lead for the ‘remain’ camp in the opinion polls, means that many corporates see a UK exit from the EU as being a fairly low probability event.
Chart 1. Favourability of 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 80% 70% 60%
75%
Debapratim De Senior Economic Analyst 020 7303 0888
[email protected] Alex Cole Economic Analyst 020 7007 2947
[email protected]
Contacts Ian Stewart Chief Economist 020 7007 9386
[email protected] Richard Muschamp CFO Programme Leader 020 7007 0724
[email protected]
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
62%
50% 40%
28%
30%
17%
20% 10%
8%
6%
0% Yes
2015 Q4
No
4% Don't know, no strong opinion, prefer not to say
Too early to say: Depends on results of renegotiation*
2016 Q1
* Option provided to respondents in the Q4 2015 survey, prior to the renegotiation in February
April 2016
Ian Stewart Chief Economist 020 7007 9386
[email protected]
2 | CFO Survey Q1 2016 Brexit tops risk list
Focus on EU referendum majority of CFOs report that A their businesses have not made, and are not in the process of making, contingency plans for a possible British exit from the EU. 26% say they either have such plans or are developing them.
Chart 2. Preparedness for a UK exit from the EU % of CFOs whose businesses have made, or are in the process of making, contingency plans for a possible British exit of the EU
Prefer not to say 20%
Yes 26%
No 53%
A large majority of CFOs think UK business and the UK economy have benefited from EU membership in terms of improved export performance, facilitating connections with other euro area nations and attracting foreign direct investment. However, only 15% consider the EU’s legal, regulatory and compliance framework as beneficial.
Chart 3. Benefits of EU membership % of CFOs who consider UK businesses and the UK economy to have benefited from EU membership in the following areas
89%
UK export performance Facilitating connections with other euro area nations
87%
Attracting foreign direct investment
86%
78%
The free movement of people
71%
The success of UK financial services UK influence in and connections with the rest of the world The legal, regulatory and compliance framework 0%
68%
15% 20%
40%
60%
80%
100%
CFO Survey Q1 2016 Brexit tops risk list | 3
Uncertainty rises FOs rate the upcoming C referendum on EU membership as the greatest risk facing their business. Deflation and economic weakness in the euro area, and weak demand in the UK also remain prominent risks. Consistent with more ‘doveish’ messages coming from the Bank of England and the US Federal Reserve, the risk posed by interest rate rises has receded significantly. CFOs are significantly less worried about emerging market weakness and geopolitics in Ukraine and the Middle East.
Chart 4. 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 The UK referendum on membership of the EU
54
50
Deflation and economic weakness in the euro area, and the possibility of a renewed euro crisis
48 48
Weak demand in the UK
46 48
The prospect of higher interest rates and a general tightening of monetary conditions in the UK and US Weakness and/or volatility in emerging markets and rising geopolitical risks in Middle East/Ukraine A bubble in housing and/or other real and financial assets and the risk of higher inflation Planned cuts in UK public expenditure under this parliament Poor productivity/weak competitiveness in the UK economy
44
49
43 37 37 36 30
35
50
41 40 40
40
45
2016 Q1
50
55
60
2015 Q4
ising concerns over the R upcoming referendum on EU membership and euro area weakness have fed through to CFO perceptions of uncertainty.
Chart 5. Uncertainty % of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high
83% of CFOs now rate the level of external economic and financial uncertainty facing their business as above normal, high or very high, the highest reading in more than three years.
85%
95%
75% 65% 55% 45%
2010 Q3
11 Q1
11 Q3
12 Q1
12 Q3
13 Q1
13 Q3
14 Q1
14 Q3
15 Q1
15 Q3
2016 Q1
Corporate risk appetite, which tends to move broadly in line with equity markets, has dropped to a three-year low despite a rally in the FTSE 100 since early February.
Chart 6. Corporate risk appetite and the FTSE 100 % of CFOs who think this is a good time to take greater risk onto their balance sheets and the FTSE 100 price index
Rising uncertainty seems to be weighing on risk appetite with just 25% of CFOs saying that now is a good time to take greater risk onto their balance sheets, down from 51% a year ago.
60%
6400
50%
5900
40%
5400
30%
4900
7400
80% 70%
FTSE 100 (RHS)
20% 10%
6900
4400 Risk appetite (LHS)
0% 2007 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 2016 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
3900 3400
4 | CFO Survey Q1 2016 Brexit tops risk list
Defensive strategies in favour Introducing new products and services or expanding into new markets is the top priority for CFOs.
Chart 7. 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 Introducing new products/services or expanding into new markets
However, CFOs’ overall balance sheet stance remains defensive with cost reduction and increasing cash flow ranked in second and third places.
43%
Reducing costs
40%
Increasing cash flow
37%
Expanding by acquisition
18%
Increasing capital expenditure
16%
Reducing leverage
Raising dividends or share buybacks
12%
Disposing of assets
12%
0%
The mix of balance sheet strategies remains close to the most defensive in three years.
13%
10%
20%
30%
40%
50%
Chart 8. CFO priorities: Expansionary vs defensive strategies 39% 37% 35% 33%
Defensive strategies
31% 29% 27% 25% 23% 21%
Expansionary strategies
19% 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 Q4 Q4 Q1 Q4 Q4 Q1 Q4 Q1 Q1 Q1 Q3 Q1
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.
CFO Survey Q1 2016 Brexit tops risk list | 5
Factors affecting investment For the first time in more than three years, a net balance of CFOs expect hiring and capital expenditure by UK corporates to decrease over the next 12 months.
Increase
Chart 9. 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
Decrease
They also anticipate cuts in discretionary spending, where expectations have fallen to a three-year low.
Hiring
100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -100%
Capital expenditure
Discretionary spending 2010 Q3
10 Q4
11 Q1
11 Q4
12 Q1
12 Q4
13 Q1
13 Q4
14 Q1
14 Q4
15 Q1
15 Q4
2016 Q1
Chart 10 compares the effect of ten key factors on corporate investment plans between the third quarter of last year and now. The further away a coloured line is from the centre, the more the factor acts to support investment. Readings below five indicate that the factor acts as a depressant on investment. Uncertainty about the economic and financial environment, and over a possible UK exit from the EU continue to be the biggest constraints on investment. Fiscal consolidation in the UK and the slowdown in emerging markets are the next biggest depressants. The main factors supporting investment are UK growth prospects, easy access to external finance and rising demand for businesses’ products and services. Chart 10. 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
Secular or long-term growth for your products or services
Cost and availability of external finance
More positive
Uncertainty about the economic and financial environment 10 9 8 7 6 5 4 3 2 1 0
Uncertainty over a possible UK exit from the EU
Fiscal consolidation in the UK (tax rises, cuts in public spending)
Actual or expected levels of economic activity/GDP growth in the UK
Actual or expected levels of economic activity/GDP growth in emerging markets
Availability of internal finance
Actual or expected levels of economic activity/GDP growth in the euro area
Actual or expected levels of economic activity/GDP growth in the rest of the world (including the US, Japan and Asia-Pacific) 2015 Q3 – Effect over last 12 months 2016 Q1 – Effect over last 12 months
6 | CFO Survey Q1 2016 Brexit tops risk list
Easy access to finance
80%
Cost of credit (LHS)
60%
60%
40%
40%
20%
20%
0%
0%
-20%
-20%
-40%
-40%
-60%
Availability of credit (RHS)
-80%
-60% -80% -100%
-100%
Credit is available
100%
80%
Credit is hard to get
100%
Credit is cheap
However, with the Bank of England carefully considering the timing of its first post-crisis rate rise, CFOs report a modest tightening in conditions.
Chart 11. Cost and availability of credit Net % of CFOs reporting credit is costly and credit is easily available
Credit is costly
Financing conditions remain benign for the large corporates on our survey panel.
Debt finance – bank borrowing and bond issuance – remains the most attractive source of funding for CFOs.
Chart 12. Favoured source of corporate funding Net % of CFOs reporting the following sources of funding as attractive
Equity issuance is less appealing, with its attractiveness down to the lowest level in three years.
Attractive
2007 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 16 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
100%
Bank borrowing
80% 60%
Bond issuance
40%
Unattractive
20% Equity issuance
0% -20% -40% -60%
2007 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 16 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
CFOs’ expectations for inflation have declined in the last three months.
Chart 13. Inflation expectations % of CFOs who expect consumer price inflation in the UK to lie between the following ranges in two years’ time
40% of them expect inflation to hover around the Bank of England’s 2.0% target in two years’ time.
70%
A growing majority anticipate considerably lower inflation, with almost 60% expecting it to be either negative or between 0 and 1.5%.
30%
58%
60%
51%
50%
44%
40%
40%
20% 10% 0%
1%
Below zero 2015 Q4
4%
1% 0-1.5% 2016 Q1
1.6%-2.5%
2%
Above 2.5%
CFO Survey Q1 2016 Brexit tops risk list | 7
CFO Survey: Economic and financial context The macroeconomic backdrop to the Deloitte CFO Survey Q1 2016 The International Monetary Fund cut its forecast for global growth this year and next. Growth in emerging markets remained subdued, led by a continued slowdown in Chinese activity. The euro area continued its modest recovery and the European Central Bank surprised markets with a bigger and broader range of monetary easing initiatives than had been anticipated. The Bank of England cut its growth forecasts for the UK economy and signalled that interest rates are unlikely to rise this year. The US economy remained a source of relative optimism, with a growing number of economic indicators surprising on the upside. Nonetheless, the Federal Reserve further scaled back its forecasts for rate rises in 2016. Japan’s central bank unexpectedly lowered interest rates into negative territory in another bid to boost growth and inflation. British opinion polls suggested a further narrowing in the margin of public support for EU membership against the backdrop of a continuing migrant crisis in Europe and the resignation from the UK Cabinet of Iain Duncan Smith, a prominent supporter of Brexit. Amid uncertainties around the vote and a weaker growth outlook the pound weakened further. The oil price rose by over a third, from the 13-year low reached in late January, to just under $40 a barrel by late March. Chart 14. UK GDP growth: Actual and forecast (%) 5
Chart 15. FTSE 100 price index 7000
Forecasts UK recovery steady
3
6500 6000
1
5500 Quarter-on-quarter growth
-1
5000 The FTSE 100 has rallied since February
4500
-3
4000
Year-on-year growth
-5
3500
Source: ONS, consensus forecasts from The Economist and Deloitte calculations
Source: Thomson Reuters Datastream
Chart 16. UK private and public sector job growth (thousands)
Chart 17. UK annual CPI inflation (%)
600
9
500
8
400
7
300
6
200
5
100
4
0
3
-100
2
-200
1
Public
Source: Thomson Reuters Datastream
Source: Thomson Reuters Datastream
2016
2015
2014
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
Q1 2015 Q4 2015
Q4 2014
-1 Q1 2014
Q4 2013
Q1 2013
Q4 2012
Q1 2012
Q4 2011
Q1 2011
Q4 2010
Q1 2010
Q4 2009
Q1 2009
Q4 2008
Q1 2008
Q4 2007
Q1 2007
Private
Inflation back in positive territory
0
Strong growth in private sector jobs
-400
1990
-300
2013
2012
2011
2010
2008
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2009
3000
-7
8 | CFO Survey Q1 2016 Brexit tops risk list
Two‑chart summary of key survey messages Chart 18. Uncertainty % of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high
Chart 19. 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 100%
95% Increase
80%
85%
Hiring
60% 40%
Capital expenditure
20%
75%
0% -20% Decrease
65% 55%
-40% -60%
Discretionary spending
-80%
2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1
2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1
-100%
45%
About the survey This is the 35th quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The 2016 first quarter survey took place between 8th and 21st March. 120 CFOs participated, including the CFOs of 20 FTSE 100 and 55 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 84 UK-listed companies surveyed is £360 billion, or approximately 17% 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 Anthea Neagle on 020 7303 0116 or email
[email protected].
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