The Deloitte CFO Survey: 2011 Q3 results
Corporates turn defensive
The third quarter’s CFO Survey shows that the recent slowdown in global growth and turmoil in financial markets has affected CFO sentiment and business strategies. CFO optimism has fallen for the third consecutive quarter and is now at levels last seen in early 2009, when the UK economy was in recession. The proportion of CFOs who say external financial and macroeconomic uncertainty is “high” or “very high” has almost doubled to 46%. And on average CFOs now see a 43% chance that the UK economy will fall back into recession.
A weaker and more uncertain economic backdrop has dented CFOs’ appetite for risk. After peaking in the first half of this year risk appetite has fallen at the fastest rate since the Survey began in 2007. This shift in risk aversion is, in turn, expressing itself in a continuing tilt in balance sheet strategies employed by CFOs. For the first time in a year cost control is the top priority for CFOs. Capital expenditure and making acquisitions have dropped down the list of priorities.
Yet CFOs have not closed the door to growth. For companies in our sample which derive more than 70% of their revenues from outside the UK the top priority by a significant margin is expansion. UK-facing companies, those which derive 70% or more of their revenues from the UK, are positioned more defensively. For this group the priorities are cost reduction and raising cashflow. The message is that CFOs see the greatest opportunities for growth lying outside the UK.
Corporate profits have made a strong recovery since the trough of the recession in 2009. For UK FTSE350 companies, for instance, recorded earnings rose by about 17% in the year to the second quarter of 2011. But the CFO Survey suggests that the profits cycle has peaked. CFOs see only modest scope for revenue growth in the next year. A clear majority expect profit margins to decline over the same period.
CFOs entered 2011 anticipating that corporate hiring and capital spending would rise over the coming year. Today, by contrast, CFOs see hiring and capital spending declining over the next 12 months.
The CFO Survey shows that uncertainty and weaker growth have had a marked effect not just on corporate sentiment but also on CFOs’ priorities. The world has become riskier and more uncertain for corporates. Most think that a period of rapid margin expansion is drawing to an end. CFOs are responding with a renewed focus on cost control. Expectations of a revival in corporate capital spending and hiring are fading. For UK corporates defensive strategies are, once again, to the fore.
About the Deloitte CFO Survey panel
In the third quarter’s CFO survey, 114 CFOs participated, including CFOs of 30 FTSE 100 and 41 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 85 UK listed companies surveyed is £535 billion, or approximately 31% of the UK quoted equity market.