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Trump, tax cuts & uncertainty: Yet CFO confidence still holds strong

31 January 2017: Confidence amongst Australian CFOs remains strong according to Deloitte’s latest CFO Sentiment report. But uncertainty has become pervasive as they continue to adjust to finance function and broader business transformation driven by disruption, and look increasingly to scenario planning as a result.

Key points from the H2 2016 survey behind the report, conducted in November and December, include:

  • A net 20% of CFOs are more optimistic than three months ago
  • While down on the 33% in H1 2016, net positive confidence results entered their fourth consecutive year
  • 78% identified ‘above normal’ to ‘very high’ levels of uncertainty– a record high for the survey
  • 24% believe the federal government’s response to economic uncertainty will be the biggest national issue likely to affect their company in 2017
  • 75% don’t believe the government’s proposed corporate tax cuts will ever be legislated
  • 53% foresee a Trump presidency as having little to no impact on their companies (in the short term)
  • 42% believe interest rates will be on the rise in 2017

Facing uncertainty with confidence

Deloitte Executive Program Leader Tom Imbesi said: “2016, dominated by events such as the outcome of our federal election, Brexit and the ascendancy of President Trump, was arguably the year where uncertainty really became the norm rather than the exception.

“In spite of this, sentiment in terms of overall business condidence remains positive. It did moderate slightly from the first half of 2016, but it has also remained net positive for more than three years now, supported by historically low interest rates, nally and a lower Australian dollar.

“So against this backdrop, CFOs are generally happy. The recent recovery in commodity prices has meant that many domestic factors have been ‘priced to perfection’ and, for the first time since we began surveying CFOs in 2009, all measured domestic contributors to CFO optimism are net positive, including commodities.

In spite of seemingly prevasive uncertainty, 2017 should be a pretty good one for Australia on the economic front. As always, there are risks on the horizon, both domestically and internationally, but Deloitte Access Economics’ outlook for 2017 is one of relative strength, and Australia is poised to break an enviable record and enter its 26th consecutive year of economic growth.

“While still confident, CFOs are also still cautious of what the future might hold. Just as 2016 presented some big global and local political and economic headlines, they also nominated the highest level of uncertainty in the eight-year history of our survey,” Imbesi said.

“Weak consumer and business sentiment is significant, and 2016 presented some big headlines with real potential to spook business, and this has left 78% of CFOs rating the general level of external financial and economic uncertainty faced by their companies between ‘above normal’ and ‘very high’.”

Trump, tax cuts, rates and risk…and looking forward

“A now President Trump isn’t a problem for CFOs, at least not yet,” Imbesi said. “At least in the shorter term, they are taking Trump in their stride, with more than half foreseeing his presidency as having little to no impact on their companies, at least in the short run.

“Confidence in the federal government’s ability to respond effectively to economic uncertainty and implement its policies has taken a hit, with corporate tax cuts proposed by the current government an example. Despite their being a flagship election policy, 75% of CFOs don’t believe cuts will be legislated, and of the 25% that do, only 2.2% have confidence that they will be enacted in 2017.

“On interest rates, and like the RBA, CFOs seem untempted by further cuts to interest rates, and only 20% think a further cut would be likely to stimulate investment in their company.

“They’ve also reversed their interest rate expectations since earlier in the year. Last time, 48% believed rates would be lower in a year’s time, while this round 42% of believe rates are set to rise.

“And attitudes towards gearing and risk have been revised too. Almost half as many CFOs believe Australian corporates are over-geared since H1 2016. And risk appetite is fairly healthy compared to historical levels, although most don’t believe now is a good time to add risk to their balance sheets.”

Finally, as ever-increasing vigilance and agility have become vital tools in the CFO’s kit, survey respondents were asked to identify scenarios they would find useful when it comes to undertaking forward-looking strategic planning.

“CFOs might be sanguine when it comes to uncertainty, but they also increasingly understand the importance of scenario planning,” Imbesi said.

“This is a real and healthy sign of the maturing CFO, moving into an increasingly strategic role, as scanning the horizon to identify and then think through what may happen next could be among the most valuable investments boards and executive management and finance teams may make.”

Scenarios identified by CFOs as the most useful included:

  • Unexpected interest rate movements
  • Continued rapid increase in innovation
  • Global growth continuing to stagnate
  • A hard landing in China
  • A housing price crash in Australia.

Note: 90 senior finance executives participatedin the CFO Sentiment survey, representing businesses with a combined market value of approximately $571.78 billion or 34.6% of the Australian quoted equity market.

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