CFO confidence: Momentum slows amid global uncertainty
Deloitte CFO Survey - Q3 2015
5 November 2015: Following consecutive quarters of strong increases in optimism, confidence appears to have plateaued among Australia’s Chief Financial Officers (CFOs).
Deloitte’s latest CFO Survey, covering Q3 2015, has identified the shift in sentiment on the back of concerns about China, and in spite of the positive influences of record low interest rates and a more favourable exchange rate.
Key survey findings include:
- Net 5% of CFOs reported that confidence levels had increased, back to levels expressed during 2014 and a low result compared to 24% in Q2 and 21% in Q1
- China’s economy is now a clear source of concern, with net 68% of CFOs stating it had hurt confidence
- Federal Government policy was a net positive influence for the first time since Q1 2014
- Low interest rates and a more favourable exchange rate still continue to support optimism
Deloitte Managing Partner Sydney Dennis Krallis said: “What had been an encouraging positive trend in terms of greater optimism since the beginning of 2015, and after an ordinary 2014, has slowed.
“Local and global uncertainty hadn’t been a particularly strong influence on CFO optimism in the first half of the year, but news regarding slower growth coming out of China, and its scale and relevance to Australia, now appears to be hitting a nerve.
“Net 68% of CFOs reported that news from China was a negative influence on optimism, the most downcast response since early 2013, when China had released its worst growth figures in nearly 15 years.
“Now, growth figures have fallen below those levels, and with global growth depending heavily on China’s smooth economic transition, it’s perhaps not surprising that uncertainty has re-emerged. More than half of CFOs believe current levels are above normal or high.”
“Commodity prices continue to weigh on CFO optimism amid rising supply and falling demand from China, the world’s biggest commodity consumer” Krallis said.
“Similarly, our share market has continued its sharp fall from a net positive influence, to starkly negative, broadly reflecting recent ASX movements.
“But it’s important to note that there are also confidence boosters. Low interest rates, a weak dollar and the change in leadership in Canberra, with the widely held perception that the new-look government is more open to tax reform and innovative policy, have all helped to temper the China impact.
“These local forces shouldn’t be underestimated, and we believe it will take time for their true positive potential on confidence to be realised.”
CFOs expect interest rates and the dollar will remain at or around their current levels over the coming year. More than 70% of survey respondents believe the dollar will sit between U.S.$0.70 and U.S.$0.80 in 12 months’ time, although the proportion expecting it to fall below U.S. $0.70 has now risen to 23%. Expectations for interest rates are more evenly distributed, although more than 40% expect rates to rise to 2.25% within the year, while around a third expect them to remain constant.
Uncertainty impacting risk appetite
“Perceptions around uncertainty have risen among CFOs, something that has also emerged in Deloitte’s member firm surveys of CFOs in both the U.K and U.S.
“While a significant majority of Australian CFOs anticipate current concerns will ease within two years, 18% believe it will persist indefinitely,” Krallis said.
“Consistent with this, the number of CFOs who feel now is a good time to take on risk has almost halved since Q1 2015, to 27%.
“The affordability and availability of credit was still rated highly in Q3, but the proportion of CFOs looking to raise gearing levels has fallen.
“Our respondents also now believe that corporates are closer to being optimally leveraged, after several quarters reporting they were generally under geared.”
Bank borrowing remains the preferred source of funding, while equity and corporate debt issuance are now markedly less attractive among CFOs. However, this nevertheless suggests that strong credit conditions are now not sufficient to offset CFO concerns regarding the future of the Australian economy.
About the survey
The Deloitte CFO Survey targets the CFOs of major Australian listed companies. It has been conducted on a quarterly basis since the third quarter of 2009. This survey covers the second quarter of 2015 and took place between 1 October 2015 and 19 October 2015. 22 CFOs participated, representing businesses with a combined market value of approximately $174 billion or 10.10% of the Australian quoted equity market.
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