Canadian CFOs’ net optimism dips as U.S. surges in Q1 2015

By William A. Cunningham, Partner, Deloitte

The latest CFO Signals — Deloitte’s quarterly survey of chief financial officers in North America — is very much a tale of two: two countries with differing expectations about what will happen to their businesses over the next 12 months, two continents facing very different economic prospects, and two types of ownership structure that influence how CFOs do their jobs and the types of pressures their businesses face.

For Canadians, the economic data make for pretty sobering reading. Sales and earnings growth expectations among Canadian CFOs for the year ahead are the lowest they’ve been in almost four years, capital expenditure growth expectations — at negative 3.3% — are the second-lowest in more than three years, and domestic hiring growth expectations hit their lowest figure since this time last year.
Meanwhile, offshore hiring expectations have continued to rise for three straight quarters to reach their highest level in three years as more companies look to offshore substantial parts of their operations in response to broader economic trends.

Look south of the border, however, and it’s a very different picture. Sales growth expectations among U.S. CFOs, at 6.1%, are about three times the Canadian expectations, while earnings growth expectations of more than 12% are nearly four times what Canadian CFOs predict for their companies. U.S. CFOs also expect to increase their capital expenditures by more than 5%, and their domestic hiring growth expectations are the highest they’ve been for almost four years.

So it’s not hard to see why net optimism — the difference between the proportion of CFOs expressing rising and falling optimism for their companies — among Canadian CFOs dropped so dramatically in the first quarter of 2015 while net optimism among U.S. CFOs is at its second-highest level in almost four years.  Nor is it hard to understand some of the likely reasons behind these divergent views, starting with oil prices, which declined from more than $79 a barrel when the previous CFO Signals survey was conducted in November 2014 to under $50 a barrel when the latest survey was done in February 2015. Lower energy prices are good news for the U.S. economy but not so good here in Canada.

Other developments since the last CFO Signals survey include a slowing Chinese economy, along with Japan and Russia being either in or near recession. That weakens demand for many of the commodities that help to drive the Canadian economy, even as the value of the U.S. dollar (in which many of these commodities are priced) has risen substantially.

With all this negative news, you might think that Canadian CFOs wouldn’t have any net optimism at all, but they do, albeit lower than usual. That’s largely due to the perceived strength of the U.S. economy and its ability to pull the global economy along, even as Europe continues to sink even lower in CFOs’ estimation. The North American economy is now described as good or very good by 59% of North American CFOs, while almost 80% consider Europe’s economy to be bad. Most CFOs say their companies are making at least one shift in geographic focus as a result, with 40% planning to increase their focus on North America while 28% plan to decrease their focus on Europe. And even though perceptions of the Chinese economy reached new survey lows, more CFOs say their companies will be increasing their focus on China than decreasing it, and more than 25% of companies surveyed say they’re planning to increase their operational capacity there.

These are the type of data that CFO Signals has been collecting from North American CFOs for the past five years, which means we’ve built up a valuable database that allows us to make quarter-by-quarter analyses as well as identify longer-term trends. But every quarter, we also ask CFOs for their views on a special topic of interest where their insights and expertise can help others facing similar issues.

In our latest survey, we explored how privately held and publicly traded companies approach investor relations, and asked CFOs of private companies about any drawbacks they faced and whether they thought about taking the company public. And we turned up something a bit surprising.

Conventional wisdom holds that privately held companies benefit from avoiding a short-term focus and from fewer compliance requirements, which is what our survey largely found. But conventional wisdom also holds that private companies can suffer from more limited financing options, which can limit growth opportunities. Yet our survey found relatively few CFOs of privately held companies complained of this drawback. Indeed, the vast majority of those CFOs said they don’t believe their company has experienced any drawbacks from being privately held over the past few years, and nearly 80% said they rarely or never consider alternate forms of private ownership or taking the company public.

Of course, one thing private companies don’t have to worry about is investor activism, but public companies increasingly do. More than 60% of public company CFOs say activist shareholders have communicated directly with their management and more than 25% have communicated through a letter to the Board of Directors. About half of public company CFOs say their company has made at least one major business decision in response to shareholder activism, with share repurchases the most common response, along with board or management changes.

While our survey did find differences in how CFOs analyze, make decisions on and communicate business information, it also found that the business focus of private companies doesn’t differ substantially from that of public ones, which may help explain why the sentiment expressed by CFOs of both types of companies doesn’t differ substantially either. Public or private, their net optimism remains positive.

Whether this will still be the case when our next survey is conducted in May will depend a lot on many of the same factors that influenced this quarter’s findings, including energy prices, exchange rates, commodity worries and, perhaps most importantly, how CFOs view the health of the global economy.

Over the past five years, the CFOs we’ve surveyed have been good early indicators of what lies ahead economically. And that makes CFO Signals an important tool for anyone interested in what may happen to the Canadian and North American economies in the next 12 months.