CFOs fear double-dip, but risk appetite returns

Posted on 12 Apr 2011 by The Manufacturer

Chief financial officers in the UK have expressed their lowest optimism about recovery and growth for two years, according to consultancy Deloitte’s annual CFO Survey.

High inflation and concerns about the effects of fiscal tightening are contributing to the dour sentiment, says Deloitte. CFOs remain cautious about the sustainability of the recovery, expressing a 29% likelihood of a double-dip recession – up from 27% last quarter.

On average, CFOs expect the UK fiscal squeeze to reduce UK corporates’ potential profits by 7% this year. Eighty-three percent see the fiscal squeeze reducing their companies’ 2011 profits.

This quarter’s survey of 137 large companies, including 46 finance directors of FTSE 100 companies, found that on balance CFOs remain positive, but optimism has dropped back to the lowest level in two years.

Despite this, attitudes to risk have not been dented and designs on growth appear bullish. Perhaps surprisingly, risk appetite has risen to the highest level since the CFO 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.

“Reduced optimism among finance chiefs seems to be influenced by external events, such as conflict in the Middle East and the earthquake in Japan, and movements in financial markets,” said Margaret Ewing, partner and vice chairman at Deloitte. “By contrast, high levels of risk appetite seem to reflect longer term judgements and more positive views on corporate balance sheets, the opportunities available to companies and financial conditions.”

The survey shows that CFOs are prepared to raise leverage for the first time since 2008, suggesting that balance sheets are getting stronger. Large companies are also pursuing growth strategies, with expansion being the top priority for CFOs over the next 12 months.

Making acquisitions and raising capital expenditure are becoming more popular strategies, following 2010 when M&A opportunities were slim. Credit availability for the largest UK corporates has risen to the highest level since the Deloitte CFO Survey started in 2007.

Finance directors see bank borrowing and bond issuance as being as attractive as they were in 2007, well before the credit crunch.

The most widespread concern about inflation – cited by 40% of CFOs – concerns the way in inflation raises input and raw material costs, threatening margins.

Ian Stewart, Deloitte chief economist, said: “CFO optimism has taken a knock, but large corporates expect revenues to rise over the next 12 months and are seeking growth opportunities through expansion, raising capital spending and acquisitions. However, with inflation at current levels, profit margins are unlikely to expand at the heady rates seen in 2010.

“While corporate profits have rebounded strongly from their lows, high inflation and the prospect of higher interest rates may limit the scope for margin growth from here. 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 two to three years.

“Finance directors also believe that the first rise in UK interest rates is in sight, with two thirds expecting the Bank of England to raise rates by September.”

In total, 86% of CFOs surveyed expect UK interest rates to rise by the end of the year. Just 4% expect base rates to stay at their current level of 0.5% for more than a year.