Deloitte CFO Survey: A cautious start to 2016

Chief Financial Officers (CFOs) of the UK’s largest companies enter 2016 in a mood of caution and with a strong focus on cost control according to Deloitte’s quarterly CFO Survey. The survey also finds levels of support among CFOs for the UK remaining in the EU have narrowed.

137 CFOs of FTSE 350 and other large private companies participated in the Q4 2015 CFO Survey.

Britain’s Future in the European Union

Repeating a question asked in the Q2 2015 Survey, Deloitte asked CFOs whether it is in the interests of UK businesses for the UK to remain a member of the EU.

• 62% favour the UK remaining in the EU, down from 74% in Q2.
• 28% say their decision depends on the outcome of the Prime Minister’s renegotiation of UK membership, up from 23% in Q2.
• 6% say UK business would benefit from leaving the EU, up from 2% in Q2.
• 4% are uncertain of their position, up from 1% in Q2.

The twin moves in CFO opinion about the EU in the last 6 months have been towards greater uncertainty and a narrowing of the lead for the ‘Yes’ camp. The ’don’t knows’ and those whose decision will depend on the results of the renegotiation now account for 32% of all CFOs, up from 24% in Q2.

Confidence and risk appetite

Asked to rate how optimistic they are about the prospects for their company compared to three months ago 30% of CFOs say they are less optimistic, up from 20% in Q2, and just 12% say they are more optimistic, down from 36% six months ago. This is the third consecutive quarter that corporate sentiment has fallen and it is now at its lowest level since Q2 2012.

CFOs’ appetite to take risk onto their balance sheets continues to wane. 37% of CFOs say now is a good time to take on risk, down from 47% in Q3’s Survey and nearly half the level of 72% seen in Q3 2014.

While a majority of CFOs still expect revenues to increase in the next twelve months, the outlook is at its weakest for two and half years. 52% of CFOs expect revenue growth, down from 81% in Q2 and 64% in Q3.

Prospects for growth

68% of CFOs say they are optimistic about growth in the UK in 2016, with 82% positive about US growth. By comparison, CFOs are much less confident about prospects for the euro area, with just 25% optimistic about growth in the region, a lower level of optimism than for emerging markets, where 27% of CFOs are optimistic about growth.

CFOs on the defensive

CFOs’ balance sheet strategies are more defensive now than at any time in the past three years.

44% of CFOs say cost reduction is a strong priority, up from 34% in Q3 and the first time in 12 months cost reduction has been the top priority. 37% say increasing cash flow is a strong priority, up from 34% in Q3, and disposing of assets rose from 9% to 13%.

CFOs are placing less emphasis on expansionary strategies. The proportion saying expanding by acquisition is a strong priority fell from 22% in Q3 to 19% in Q4, while those saying raising capital expenditure is a strong priority fell from 19% to 17%.

Interest rates and inflation

CFOs’ expectations for inflation have fallen. 51% expect inflation to remain below 1.5% in two years’ time and 44% expect inflation to be between 1.6% and 2.5%.

CFOs are well positioned to cope with interest rate rises in the next three years. 64% say that interest rates would have to rise by 1.0 percentage point (100 basis points) before their businesses cut planned investments or employment. 10% say a rate rise would be good for their business.

Ian Stewart, chief economist at Deloitte, said:

“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. 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.

“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.

“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 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.”

David Sproul, senior partner and chief executive of Deloitte, said:

“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.

“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.”