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Corporate optimism and risk appetite drop sharply

By CreditMan Monday, October 5, 2015

Corporate risk appetite and sentiment has faded in the face of weakness in emerging economies and global equity markets according to Deloitte’s latest survey of Chief Financial Officers (CFOs).

The Deloitte CFO Survey for Q3 2015 gauged the views of 122 CFOs of FTSE 350 and other large private UK companies.

CFOs’ perceptions of external financial and economic uncertainty have seen the sharpest rise since this question was first asked five years ago. 73% of CFOs say the level of financial and economic uncertainty is above normal, high or very high. This is up from 55% in Q2 and marks a return to the level last seen in Q2 2013.

Corporate risk appetite has dropped. 47% of CFOs say now is a good time to take risk on to their balance sheet, down from 59% in Q2 2015. Rising risk aversion is feeding into a more defensive stance on the part of major corporates, with a greater focus on cost reduction and rather less on investment.

Levels of optimism among CFOs have also fallen. 29% of CFOs are less optimistic about the financial prospects for their company than they were three months ago, compared to 20% in Q2, while 19% are more optimistic, compared to 36% in Q2.

This quarter’s survey saw dips in expectations for hiring and capital expenditure. 41% of CFOs say they expect UK corporates to increase capital expenditure over the next 12 months, down from 66% in Q2, while 48% say businesses will increase hiring over the next year, down from 70% in Q2.

Asked to rate the factors that pose threats to their business (on a scale of 0 to 100), CFOs attach a rating of 48 to the prospect of higher interest rates, 47 to weakness in emerging markets and geopolitical risks (up from 43 in Q2’s survey) and 47 to deflation and economic weakness in the euro area.

CFOs gave a rating of 42 to the UK’s referendum on EU membership, down from 45 in Q2. The rating attached to poor UK productivity fell from 40 in Q2 to 35 in Q3, while the risk rating of UK public spending cuts rose from 34 to 38.

In a separate question, 60% of CFOs said that the slowdown in China will have a negative effective on their business in the next twelve months.

Credit conditions remain exceptionally easy and large corporates remain confident about the cost and availability of credit. 84% of CFOs say new credit is cheap and 79% say credit is readily available. Both remain close to their best readings in eight years.

64% of CFOs expect UK inflation to lie between 1.6% and 2.5% in two years’ time, with 31% predicting a rate between 0% and 1.5%.

Ian Stewart, chief economist at Deloitte, said:

“Emerging market weakness and equity market turmoil have taken a toll on risk appetite amongst the UK’s largest businesses. But sentiment among large businesses is changeable and heavily influenced by the global environment, especially by news flow and the performance of equity markets. In both areas good news has been in short supply of late: UK equities down 16% from their April peaks; US institutional investor optimism at 2009 levels; financial market volatility up sharply and more downgrades to emerging market growth forecasts.

“The firms on the CFO Survey panel are large and have heavy overseas exposure, with more than half of their revenues coming from outside the UK. While external risks are centre stage, CFOs are positive on prospects for the UK economy. CFOs rate uncertainty and emerging market weakness as constraints on investment but see the state of the UK economy as being a significant support for investment.

“Falling corporate risk appetite and sentiment suggests that the Federal Reserve and Bank of England have been absolutely right to maintain interest rates at ultra-low levels. But despite the more emollient tone from central banks, CFOs still see tighter monetary policy as the number one threat to their businesses. From a central bank point of view this may be the worst of both worlds - a corporate sector which is worried both about slower global growth and about the prospect of higher interest rates.”

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

“Softening demand in emerging economies, greater financial market volatility and higher levels of risk aversion make for a more challenging backdrop for the UK’s largest businesses.

“The UK economy is in pretty good shape. Low inflation and rising pay have rebooted consumer incomes. Boosted by cheap credit, consumer spending, which accounts for more than 60% of the economy, has risen 3.1% in the last year, the fastest rate in eight years. Nor should we overdo the gloom on the external environment. The outlook for emerging market economies has softened, but the US is seeing a decent recovery, the euro area is growing again and the pace of activity seems likely to quicken into 2016".

Source - Deloitte