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UK finance bosses cut risk appetite on economic fears

FTSE 350 finance chiefs now have less appetite for corporate risk due to weaknesses in emerging economies and global equity markets.

That’s the message to emerge from Deloitte’s latest CFO Survey for Q3 2015, which gauged the views of 122 CFOs of FTSE 350 and other large private UK companies.

The Big Four firm found that CFOs’ perceptions of external financial and economic uncertainty experienced the most dramatic rise since the question was first posed five years ago. Nearly three quarters (73%) of CFOs say the level of financial and economic uncertainty is above normal, high or very high – up from 55% in Q2 and a return to a level last seen in Q2 2013.

Corporate risk appetite has dropped. Some 47% of CFOs say now is a good time to take risk on to their balance sheet, down from 59% in Q2 2015. An uptick in 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 decreased with 29% now less upbeat about their company’s financial prospects than they were three months ago, compared to 20% in Q2, while 19% are more optimistic, compared to 36% in Q2.

The latest quarter saw a fall 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 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.

Some 60% of CFOs said the slowdown in China will have a negative effective on their business over the coming year.

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: “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.”

David Sproul, senior partner and chief executive of Deloitte, said the gloom should not be overdone.

“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”.

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Jimmy Eyerman...Chief Financial Officer, EDM Group, USA