The Deloitte CFO Survey: 2011 Q1 results
Optimism down, risk appetite up
The mood of optimism with which CFOs entered 2011 has weakened in the 2011 Q1 Deloitte CFO Survey. CFOs remain, on balance, positive, but our optimism indicator has dropped back to the lowest level in more than two years. Such caution fits with the news flow during the survey period, between 11th and 28th March which coincided with conflict in the Middle East, Japan’s earthquake and nuclear crisis and an elevated oil price. In the UK, inflation rose and the Budget focussed attention on impending tax rises and cuts in public spending. One of our special questions this quarter shows that, on average, CFOs expect the UK’s fiscal squeeze to reduce potential profits by 7.0% this year.
CFOs remain cautious about the recovery. On average, they attach a 29% probability to the chance of a double dip in the economy. The fact that controlling costs is a high priority for CFOs suggests they are alive to downside risks.
Lower levels of optimism have not, however, dented CFOs’ attitudes to risk. On the contrary, risk appetite has risen to the highest level since the survey started in the third quarter of 2007, with 41% of CFOs saying that this is a good time to take risk on to their balance sheets. Risk appetite is strongest among the largest companies on our Survey panel.
While optimism responds to news flow, high levels of risk appetite seem to reflect longer term and more positive views on the strength of corporate balance sheets, the opportunities available to companies and financial conditions.
In a sign of growing confidence about balance sheets, the balance of opinion among CFOs has shifted towards raising leverage for the first time since 2008. Large corporates are also pursuing growth strategies. Expansion is the top corporate priority for CFOs over the next 12 months. Making acquisitions and raising capital expenditure are increasingly popular strategies. And, for now at least, financial conditions are favourable for larger companies. Our measure of corporate credit availability has risen to the highest level since the Survey started in 2007. CFOs see bank borrowing and bond issuance as being as attractive to corporates as they were in 2007, well before the credit crunch.
Corporate profits have rebounded strongly from their lows. But high inflation and the prospect of higher interest rates may be limiting the scope for further margin growth. CFOs are less confident than the Bank of England that inflation will decline over the next two years. Most CFOs think there is a less than even chance of inflation falling back to its 2.0% target in 2 to 3 years. CFOs’ principal concerns about inflation relate to the way in which it raises input costs and threatens margins. The first rise in UK interest rates is also in sight with two thirds of CFOs expecting the Bank of England to raise rates by September.
The result is that CFOs have become less positive about prospects for margin growth. Indeed, the balance of CFOs expecting margins to rise over the next 12 months has dropped from +21% to +3%, suggesting that there is only a modest scope for margin expansion.
CFOs’ optimism has taken a knock. But big corporates expect revenue to rise over the next 12 months and are increasingly seeking growth opportunities through expansion, raising capital spending and acquisitions. With inflation at elevated levels, CFOs think that margins are unlikely to expand at the heady rates seen in 2010.
About the Deloitte CFO Survey
The Deloitte CFO Survey, launched in 2007, is a quarterly survey of Chief Financial Officers and Group Finance Directors of major UK companies. The Survey captures shifts in UK CFOs' opinions on valuations, risks and financing and has become a benchmark for gauging financial attitudes of major corporate users of capital.
Over 300 CFOs, mainly from FTSE 350 companies, have joined the CFO Survey panel. In the latest survey, covering the first quarter of 2011, 137 CFOs participated, including CFOs of 46 FTSE 100 and 46 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 105 UK listed companies surveyed is £728 billion, or approximately 37% of the UK quoted equity market.
The Deloitte CFO Survey has been widely quoted in the media and is firmly established with the policymakers. The Bank of England has cited the CFO Survey several times in its publications such as the quarterly Inflation Report and the monthly Trends in Lending report. The findings have also been quoted in the minutes of the Bank's Monetary Policy Committee meetings.