The Deloitte CFO Survey: 2011 Q2 results
The decline in business optimism seen in the first quarter CFO Survey has accelerated with CFO sentiment falling at the fastest rate since the failure of Lehman Brothers in September 2008. Our CFO optimism measure has dropped to its lowest level since 2009, a time when the UK economy was in recession. Confidence that the recovery can be sustained has also taken a knock. On average CFOs see a 33% chance of a double dip.
This mood of caution is reflected in a shift in balance sheet strategies employed by CFOs. They are putting more emphasis on cost control and increasing cash flow than at any time in the last year. There is also a growing belief that the upswing in corporate revenues is likely to slow over the next 12 months. A year ago, the dominant view among CFOs was that profit margins were heading higher. Today, the balance of opinion is that margins are set to narrow. CFOs believe that the period of strong growth in profit margins is drawing to an end.
While CFOs have become more cautious, they remain willing to take greater risk. High levels of risk appetite seem to reflect three main factors: the strength of corporate balance sheets, the availability of capital at a relatively low cost and a perception that, while uncertainties abound, the current environment also presents opportunities for profitable growth.
Consistent with high levels of risk appetite, CFOs say their top priority remains the introduction of new products/services or expansion into new markets. Expanding by acquisition and raising capital expenditure also remain prominent priorities. Our measure of balance sheet strategies shows a bias in favour of expansion, albeit less than that in the last two quarters.
These results hide a significant distinction between the priorities of individual CFOs. Our panel is made up of large corporates, many of them with extensive international exposure. On average, companies which responded to the second quarter survey receive about half their revenues from the UK and half from overseas.
Our analysis shows that more overseas exposed companies have higher levels of risk appetite and are pursuing more expansionary strategies than their UK-facing counterparts. For the overseas exposed companies – those who derive more than 70% of their revenues from outside the UK - the top priorities are introducing new products or services or expanding by acquisition. For companies which derive more than 70% of revenues from the UK, the priorities are cost reduction and increasing cash flow.
CFO optimism has fallen sharply. Yet strong corporate balance sheets and good financing conditions mean that many CFOs are continuing to look for opportunities for expansion. This quarter’s survey suggests that CFOs see many of those opportunities lying overseas.
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 second quarter of 2011, 131 CFOs participated, including CFOs of 34 FTSE 100 and 44 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 92 UK listed companies surveyed is £616 billion, or approximately 31% 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.