The Deloitte CFO Survey [PDF]

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UK businesses for the UK to remain a member of the EU. 0%. 10%. 20%. 30%. 40% ... Corporate risk appetite often reflects trends in financial markets. .... 40. 45. 50. 55. 60. 65. 2 | CFO Survey Q4 2015 The year ahead: A cautious start to 2016 ...
Q4 2015

The Deloitte CFO Survey The year ahead: A cautious start to 2016 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. 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 pace of tightening is expected to be gentle, with threemonth 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.

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 80% 70%

74% 62%

60% 50% 40% 30%

23%

20% 10%

6%

2%

0% Yes

2015 Q2

January 2016

No

2015 Q4

28%

1% Too early to say: Depends on results of renegotiation

4%

Don't know, no strong opinion, prefer not to say

Authors Ian Stewart Chief Economist 020 7007 9386 [email protected] 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

2 | CFO Survey Q4 2015 The year ahead: A cautious start to 2016

Europe 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.

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 2. UK public opinion polls on EU membership Mid-year polling (May to July)  

 

In

Out

Don't Know

ICM

31 May

47%

33%

20%

Lead (In) +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

Chart 3. Growth prospects Net % of CFOs who are optimistic about prospects for growth in the following regions in 2016 100% 80%

68%

82%

60% 40% 20% 0% -20% -40%

-27% Emerging markets excluding China*

-25% Euro area

-18% Emerging markets including China*

-6%

-5%

Japan

China

UK

US

*GDP-weighted estimate based on CFO readings for emerging markets excluding China, and for China

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-ahalf year low in November.

Chart 4. German and US business confidence German Ifo Business Climate Index and US ISM Purchasing Managers Index (Manufacturing) 120

65

115

60

US ISM (RHS)

110

55

105

50

100

45

95

German IFO (LHS)

90

40 35

85 80 Dec 05

30 Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

Dec 13

Dec 14

Dec 15

CFO Survey Q4 2015 The year ahead: A cautious start to 2016 | 3

Risk appetite wanes 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.

Chart 5. Risk appetite % of CFOs who think this is a good time to take greater risk onto their balance sheets 80% 70% 60% 50% 40% 30% 20% 10% 0%

2007 08 Q3 Q1

08 Q3

09 Q1

09 Q3

10 Q1

10 Q3

11 Q1

11 Q3

12 Q1

12 Q3

13 Q1

13 Q3

14 Q1

14 Q3

The fall in corporate risk appetite has been mirrored by a decline in investor risk appetite.

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)

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.

75

15 Q1

% CFOs saying now is a good time to take risk (RHS)

70

80 70

65

Equities vs bonds (LHS)

60

60

50

55

40

50 45

30

40

20

35

10

30 2007

2008

2009

2010

2011

2012

2013

2014

2015

More optimistic

Chart 7. Business confidence Net % of CFOs who are more optimistic about financial prospects for their company now than three months ago

Less optimistic

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.

15 Q3

60% 40% 20% 0% -20% -40% -60% -80% 2007 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 Q3 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4

0

4 | CFO Survey Q4 2015 The year ahead: A cautious start to 2016

Focus on cost control 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.

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 44%

Reducing costs

34%

Introducing new products/ services or expanding into new markets

38% 39% 37% 34%

Increasing cash flow 19% 22%

Expanding by acquisition

17% 19%

Increasing capital expenditure Raising dividends or share buybacks

Disposing of assets

14% 8% 13% 9% 12% 10%

Reducing leverage 0%

10%

20%

40%

50%

2015 Q3

2015 Q4

The increased focus on defensive strategies means that CFOs are more defensive than at any time in the last three years.

30%

Chart 9. CFO priorities: Expansionary vs. defensive strategies 39% 37% 35% Defensive strategies

33% 31% 29% 27% 25%

Expansionary strategies

23% 21% 19% 2010 Q3

2011 Q1

2011 Q4

2012 Q1

2012 Q4

2013 Q1

2013 Q4

2014 Q1

2014 Q4

2015 2015 Q4 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 Q4 2015 The year ahead: A cautious start to 2016 | 5

Inflation and interest rates CFOs’ expectations for inflation fell between the third and fourth quarters of 2015.

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

A narrow majority (51%) now expect inflation to remain below 1.5% in two-years’ time.

60%

The fall in CFOs’ expectations for inflation coincided with downgrades to both market and Bank of England forecasts for inflation in 2016.

30%

56%

51%

50%

44%

39%

40%

20% 10%

5%

1%

0%

Below zero

0-1.5%

2015 Q3

1.6%-2.5%

4%

Above 2.5%

2015 Q4

As inflation forecasts have fallen so, too, have financial market expectations for future interest rates.

Chart 11. Financial market expectations for UK interest rates UK market rate expectations for end-year three-month 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.

2.0

2.5 at Dec ’18 1.6% at Dec ’17 1.3%

1.5

at Dec ’16 0.9%

1.0

Now 0.6%

0.5 0.0 Jun 15

Aug 15

Jul 15

Sep 15

Oct 15

Nov 15

Dec 15

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.

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

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.

20%

30% 25%

36% say rate rises of ≤100bp would affect investment/jobs

26%

24% 21%

15% 10% 5%

10%

8%

64% say rates would have to rise by >100bp to affect investment/jobs 10%

2%

0% 25 basis points

50 basis points

100 basis points

200 basis points

300 basis points

More than A rise in 300 basis interest rates points would be good for my business

6 | CFO Survey Q4 2015 The year ahead: A cautious start to 2016

Weaker margins Revenues

90% 70%

Operating margins

50% 30% 10%

Decrease

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.

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

Increase

Expectations for revenue and margin growth dipped in the second half of 2015.

-10% -30% -50% -70% 2010 10 11 11 11 11 12 12 12 12 13 13 13 13 14 14 14 14 15 15 15 15 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

100% 60%

100% 80%

Cost of credit (LHS)

60%

40%

40%

20%

20%

0%

0%

-20%

-20%

-40% -60% -80%

-40% Availability of credit (RHS)

-60% -80% -100%

-100%

2007 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 Q3 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4

100%

Bank borrowing

80% Attractive

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.

Chart 15. Favoured source of corporate funding Net % of CFOs reporting the following sources of funding as attractive

Bond issuance

60% 40% 20% 0%

Unattractive

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.

Equity issuance

-20% -40% -60% 2007 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 Q3 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1

15 Q4

Credit is costly

80%

Credit is cheap

Credit is cheap

The cost of credit is not far off its lowest reported levels, while credit availability is near to alltime highs.

Chart 14. Cost and availability of credit Net % of CFOs reporting credit is costly and credit is easily available

Credit is costly

Our panel of large corporates continues to enjoy good access to credit.

CFO Survey Q4 2015 The year ahead: A cautious start to 2016 | 7

CFO Survey: Economic and financial context 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.

UK GDP growth: Actual and forecast (%)

FTSE 100 price index 7000

5% Forecasts

3%

6500 6000

1% Quarter-onquarter growth

-1%

5500 5000

-3% Year-on-year growth

-5%

-7% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: ONS, consensus forecasts from The Economist and Deloitte calculations

4500 4000 3500 3000 2008

2009

2010

2011

2013

2014

2015

Source: Thomson Reuters Datastream

UK private and public sector job growth (thousands)

UK annual CPI inflation (%)

600

9

500

8

400

7

300

2012

6

200

5

100

4

0

3

-100

2

-200

1

-300

0

Source: Thomson Reuters Datastream

Source: Thomson Reuters Datastream

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

Private

1994

Public

-1 1992

Q1 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q3 Q2 2007 2007 2008 2009 2010 2011 2012 2013 2014 2015

1990

-400

8 | CFO Survey Q4 2015 The year ahead: A cautious start to 2016

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

80%

39% 37%

74%

70%

35%

62%

60%

CFO priorities: Expansionary vs. defensive strategies

Defensive strategies

33%

50%

31%

40%

29%

30%

23%

20%

28%

27% 25%

10%

6%

2%

0% Yes

2015 Q2

No

1%

Too early to say: Depends on results of renegotiation

4%

Don't know, no strong opinion, prefer not to say

Expansionary strategies

23% 21% 19% 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 Q4 Q4 Q1 Q4 Q4 Q4 Q1 Q1 Q1 Q3 Q1

2015 Q4

About the survey This is the 34th quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The 2015 fourth quarter survey took place between 11th November and 2nd December. 137 CFOs participated, including the CFOs of 24 FTSE 100 and 62 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 99 UK-listed companies surveyed is £374 billion, or approximately 18% 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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