35 per cent drop in CFO confidence linked to easing growth rate in ChinaDOWNLOAD
1 August 2013: Following three consecutive quarters of rising optimism, this sentiment has now fallen away in the latest Deloitte Quarterly CFO survey. The net percentage of CFOs who felt more optimistic about their company’s future financial prospects than they did three months ago is down to -11% (see chart 1 below), a significant drop of 35% from the 24% of CFOs who were more positive last quarter.
This quarter, confidence levels were most profoundly influenced by the slow-down in China, with 85% of CFOs citing it as a negative impact, up from 34% in Q1 (see chart 2 below). This made China the biggest concern for Australian CFOs in the June quarter, overtaking Federal government policy uncertainty for the first time.
Commenting, Deloitte chief operating officer, Keith Skinner said: “This represents the highest level of pessimism since the Deloitte Quarterly CFO survey began in 2009.”
“The increasing pessimism amongst Australian CFOs is in stark contrast to those in the UK and North America who are enjoying their highest levels of confidence in recent years”, said Mr Skinner. “CFO sentiment across the three regions has previously tracked in line, this is the first time we have seen a significant divergence.”
UK CFOs have enjoyed four consecutive quarters of improving confidence as concern about a Euro area break up subsides along with worries about external macro and financial risk, resulting in net optimism at 18%. Meanwhile net optimism in North America continued to rise from 32% in Q1 to 48% in Q2, this may be attributed to the U.S. emerging from a particularly weak period and is now showing stronger signs of growth.
Mr Skinner comments, “On one side we have a number of really positive indicators working in businesses’ favour here in Australia. They include interest rates at record lows and a depreciating Australian dollar, which will have had a positive impact on cash flows of many Australian companies in the last quarter.”
“The lower dollar has improved company financial prospects for 52% of respondents, while 82% of CFOs agreed that it has improved Australia’s global competitiveness.”
“Although the recent growth rate of 7.5% in China is below previous decades, it remains solid and is likely to remain so for some time,” said Mr Skinner. “We are not sure if China can really be blamed for the gloomy outlook amongst Australian CFOs. What this does confirm is that confidence levels remain fragile so even a slight easing of growth in China is enough to rattle local CFOs, especially while they wait for more policy certainty at home.”
Commenting on the divergence between Australia, UK and North America Mr Skinner said, “As things stand, UK and North American CFOs are taking far more comfort in the positive indicators in their domestic economies than their counterparts in Australia. As we switch from the investment period to the production period of the mining boom it’s fair to say that local CFOs are apprehensive about what could be a very bumpy transition.”
Appetite for M&A boosted by cheaper and more available credit
With the RBA dropping interest rates to 2.75% in May, 41% of CFOs share the view that credit is either somewhat or very cheap (see chart 3 below). In addition, availability of credit has continued to rise with 85% of respondents saying it was somewhat or very available, while only 9% found it hard to get. Credit is now cheaper and more available than at any other time since the survey began.
There are signs of renewed interest in M&A by 54% of participants, up from 40% for the first quarter of 2013, reflecting ongoing consolidation in the economy. Organic growth continued to be a priority for 63% of respondents.
CFOs were divided on the outlook for gearing with 28% expecting it to increase and 24% planning to reduce gearing. While debt is more available and affordable, companies are still exercising caution and conservatism with their own balance sheets; a possible forward indicator of things to come.
Chart 1: Net percentage of CFOs who are more optimistic about the financial prospects of their company than they were three months ago
Chart 2: Extent to which CFO net optimism levels have been affected by external economic factors
Chart 3: Net percentage of CFOs reporting that credit is available and the net percentage of CFOs reporting that credit is expensive
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