UK CFO confidence is dipping slightly as global macro-economic conditions start to bite and uncertainty surrounding the upcoming EU referendum manifests. Engaging in balance sheet risk taking has dropped off slightly, while business confidence has decreased below the positive line. The decreasing confidence is seeing CFOs increasingly looking to cut costs, research by Deloitte shows, while also de-leveraging and disposing of assets.
In the latest quarterly UK CFO survey, the 34th run, Deloitte explores the business confidence among CFOs in the UK. The survey involved 137 CFOs, of which 24 are from FTSE 100 and 62 from FTSE 250 companies, while the rest come from large UK-listed companies.
The global economic forecasts for 2015 and 2016 were cut by the International Monetary Fund in the face of a host of geopolitical and market stutters. Emerging market activity has been lacklustre, with China going through a period of unknown slowdown. Advanced economies too have been under considerable pressure from softening manufacturing activity from weaker export market demand. Decreases in the price of oil and commodities have placed further downward pressure on inflation, which has already been trending at record lows. The ECB has been actively intervening with Quantitative Easing, although its latest announcements fell short of market expectations. Interest rates remain at historically low levels, although the first rates hike in the US comes with some uncertainty. This is not withstanding the continued questions about the UK’s position in the EU, with the upcoming referendum, and renegotiations, creating market uncertainty.
The good news is that the CFOs remain optimistic about the growth prospects in the UK itself. Of the respondents, 68% are expressing their optimism. The CFOs are also optimistic about growth in the US. They are considerably less optimistic about the Euro-area and emerging market growth, at -25% and -18% respectively.
Ian Stewart, Chief Economist at Deloitte, comments: “CFOs are most positive about growth in the UK and US in 2016. But despite stronger than expected growth in the euro area in 2015, UK CFOs remain pessimistic about prospects for the region. Levels of confidence about growth in the euro area are lower than for emerging market economies.”
The survey also highlights that the appetite to take balance sheet risks is waning. Confidence in it being a good time to take greater risks has dropped from above 70% in Q3 2015 to around 40% in Q3 2015. The drop in risk appetite is, according to Deloitte, mirrored by the more muted investor risk appetite. “UK corporate sector risk appetite has fallen to a three and a half year low mirroring the loss aversion and caution being seen in financial markets,” remarks Stewart. “With a much sharper focus on cost control and less emphasis on growth through acquisitions and capital spending, CFOs’ strategies are more defensive than at any time in the past three years.”
Business confidence too is on the decrease as macro-economic factors weigh in on the reporting CFOs. CFOs are now less optimistic about prospects than they were three months pervious, trending down from more than two year of positive confidence. Stewart explains: “Doubts about the pace and sustainability of the global recovery are weighing on business sentiment. Confidence fell throughout 2015 and ended the year at its lowest level since Q2 2012, when the euro area was in recession.”
The priorities for CFOs have also seen considerable changes over the past months; cost reduction has become a priority in Q4 2015 for 44% of respondents, up from 34% three months previous. The introduction of new products and services lost some ground, falling from 39% to 38%. M&A appetite too has fallen slightly, down from 19% to 17%. Reducing leverage and disposing of assets are both up a tad, increasing from 10% to 12% and 9% to 13% respectively.
Commenting on the changing priorities, Stewart says: “The surge in business confidence that started in late 2012 went into reverse in 2015. CFOs are reacting to uncertainties abroad by cutting back on risk taking and sharpening their focus on cost reduction. The more defensive stance by CFOs points to a softening in the growth of corporate hiring and capital spending in coming months.”
The EU decision
The survey also explored the CFOs’ attitude towards the decision of staying within the EU, asking if it is in the interest of UK businesses to do so. The results show a decrease in positive attitude towards remaining in the EU, even while the vast majority are either on the fence or believe it is in the UK’s best interest. The largest group are those that say yes to the UK’s place in the EU.
“A clear majority of CFOs continue to favour the UK remaining in the EU, but the proportion of those expressing unqualified support has fallen. This mirrors what we have seen from the broader public in opinion polls in the last six months,” says David Sproul, Senior Partner and Chief Executive of Deloitte. “With around one third of CFOs undecided on their position or awaiting the outcome of renegotiation discussions, the eventual deal may well significantly affect business attitudes to EU membership.”