Professional Documents
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Confidence dips
Financial strategies 6
Market outlook 7
This is the twelfth quarterly survey of Chief Financial Officers and Group Finance
Directors of major companies in the UK. The 2010 second quarter survey took
place between 11th and 25th of June. 125 CFOs participated, including the
CFOs of 32 FTSE 100 and 44 FTSE 250 companies. The rest were CFOs of other
UK listed companies, large private companies and UK subsidiaries of major
companies listed overseas. The combined market value of the 93 UK listed
companies surveyed is £446 billion, or approximately 28% of the UK quoted
equity market. The Deloitte CFO Survey is the only survey of major corporate
users of capital that gauges attitudes to valuations, risk and financing.
The latest CFO Survey shows a decline in financial Chart 1. Financial prospects
optimism with the balance of respondents reporting Net % of CFOs who are more optimistic about financial prospects for their company now than
greater optimism dropping from 40% to 24%, the three months ago
lowest reading in a year and the second consecutive
60%
More optimistic
quarterly decline.
40%
The average CFO now attaches a 38% probability to
20%
there being a “double dip”, up from 33% in the first
quarter 2010 survey. This decline in confidence is 0%
consistent with a more cautious mood in financial Less optimistic
-20%
markets and growing concerns about renewed
economic weakness. -40%
-60%
-80%
2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
The readings from the CFO Survey often show a close Chart 2. Deloitte Financial Stress Index
relationship between financial market conditions and
300
corporate sentiment. The decline in CFO optimism in 280
our latest Survey has occurred against a backdrop of 260
rising stress in the financial markets. 240
220
Within financial markets, investors have been moving 200
from equities to less risky assets, such as US Treasuries, 180
Lehman bankruptcy
in response to the Euro Area debt crisis and concerns 160
Euro area
140 crisis
about the region’s banks.
120
100
80
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul
07 07 07 07 08 08 08 08 09 09 09 09 10 10 10
The Deloitte Financial Stress index is an arithmetic average of the ratio of 3 month LIBOR to base
rates, the ratio of yield on high yield bonds to yield on government bonds, the VIX index, the
ratio of total market return to banking stocks return and the ratio of yield on long term
government bonds to yield on short term bonds.
Our tracking of UK newspaper stories confirms a more Chart 3. Deloitte corporate newsflow index
negative tone to corporate news stories in June. Stories
More good news
-100
Less good news
-200
-300
-400
-500
-600
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Corporate news flow index tracks major UK broadsheets for positive and negative news stories
from the UK corporate sector.
2
Fiscal squeeze dampens sentiment
One example of the linkage between financial market Chart 4. Is it a good time to tap the capital markets?
performance and corporate behaviour can be seen in
Net % of CFOs who think now is a good time to issue equity or corporate bonds
CFOs’ changing attitudes to funding.
60%
Bonds
CFOs have become markedly less enthusiastic about
Good time
40%
issuing equity. The balance of CFOs who believe that
this is a good time to issue equity has dropped at the 20%
-80%
-100%
2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
CFOs see more risks than benefits to their companies Chart 5. Impact of fiscal squeeze
from the coming squeeze on UK public spending.
% of CFOs who anticipate significant/some or % of CFOs who think their company will see
no negative effects in the short term on their significant/some or no benefits in the long
Two thirds of CFOs expect tighter fiscal policy to have company as a result of the fiscal squeeze. term from the fiscal squeeze.
negative effects on their companies particularly relating
10% 5%
to concerns about reduced consumer spending and job
losses in the public sector.
34% 26%
However, 31% foresee benefits in the long term for
their companies. Long term benefits cited by a number
of CFOs include a reduction in business red tape and
56% 69%
lower taxes.
Fiscal tightening is likely to slow the pace of the UK’s Chart 6. Factors supporting growth during fiscal consolidations
recovery, although evidence from other countries,
including Sweden and Canada, suggests it is possible
to shrink the public sector and sustain growth.
Microeconomic Global
flexibility demand
Such episodes have generally taken place in flexible
economies with governments that seek to bolster the
private sector, often with tax cuts. A weak currency and
strong overseas demand are also important in helping
offset shrinking public expenditure.
The UK scores reasonably well on these criteria and, Weak Support for
perhaps for this reason, the independent Office of currency the private sector
Budget Responsibility (the “OBR”) sees the Emergency
Budget slowing, not derailing, growth. In the light of
the Budget, the OBR trimmed its 2010 GDP forecast
from 1.3% to 1.2% and its 2011 forecast from 2.6%
Source: Economics & Markets, Deloitte Research
to 2.3%.
Despite recent uncertainties bank borrowing has Chart 7. Favoured source of corporate funding
continued to gain popularity with CFOs. Bank borrowing
Net % of CFOs reporting the following sources of funding as attractive
is now seen as being as attractive as it was in early
2008, before the financial crisis took grip. 60% Bond
issuance
40%
Meanwhile the two other major sources of external
Attractive
finance for corporates, equity and corporate bonds,
20%
have dipped in popularity with CFOs.
0% Bank
borrowing
Unatractive Equity
-20% issuance
-40%
-60%
2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
The growing attractiveness of bank borrowing to Chart 8. Cost and availability of credit
corporates partly reflects an improvement in credit
Net % of CFOs reporting credit is costly and credit is easily available
conditions. CFOs now perceive credit as being more
available and the cost of new credit lower than at any 100% 100%
Cost of credit (lhs)
time since the third quarter of 2007.
Credit is available
80% 80%
Credit is costly
60% 60%
The CFO Survey covers larger UK corporates and the 40% 40%
experience of smaller companies may be different.
20% 20%
Nonetheless, our results suggest that the process of
0% 0%
balance sheet repair in banks has generated a
Credit is cheap
0%
-20%
-40%
2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
4
Credit, cash, risk
This quarter’s CFO Survey includes two new questions Chart 10. Corporate demand for credit
on the demand for credit.
25% 23%
A balance of CFOs say that their demand for credit has 20%
fallen in the last 12 months, a finding which fits with
the sharp decline seen in the official credit data. 15%
But looking ahead CFOs are more positive. Over the 10%
next 12 months CFOs think their demand for credit is
5%
going to increase
-2%
0%
-5% Net % of CFOs who said their Net % of CFOs who said
company’s demand for their company’s demand
new credit has increased for new credit is likely to
in the last 12 months increase in the next 12 months
50%
40%
Increase
30%
20%
10%
0%
2008 2008 2009 2009 2009 2009 2010 2010
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
-50%
-60%
-70%
-80%
-90%
-100%
2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
% of CFOs who have selected the following factors among their top 3 priorities
This quarter’s Survey sheds light on the strategies CFOs are adopting for their business in what is generally expected to be an uncertain and
challenging environment.
Cost control, remains, as it was six months ago, the top priority for CFOs. This strategy has served CFOs well during the downturn and they
continue to see it as being vital for their companies over the next year.
But we can also detect a shift to more expansionary policies. CFOs responded to the credit crunch and the ensuing recession with a strong focus
on building cash flow. That was CFOs’ top priority in December 2008, at the low point of the cycle, and a year later, in December 2009, with the
recovery underway, increasing cash flow was still the number one priority. But in the second quarter 2010 boosting cash flow has dropped to
fourth position, below expanding into new markets and introducing new products or services. A reduced emphasis on cash is consistent with the
strengthening of cash flow expectations and improving credit conditions seen elsewhere in the Survey.
Increasing capital expenditure has also jumped up the league table, with the proportion of CFOs rating this as a priority almost doubling since the
start of the year.
This changed set of rankings paints a mixed picture. On the one hand doubts about the recovery mean that cost control is still king for most
CFOs. Yet cash flow is no longer the central preoccupation it was. Crucially, corporates are increasingly focused on growth strategies, such as
expanding into new markets, bringing in new products or services, growing by acquisition and raising capital spending.
6
Market outlook
CFOs have become more optimistic about the outlook Chart 14. Outlook for UK equities
for UK equities even as the market has fallen.
Net % of CFOs who expect FTSE 100 to be higher in a year’s time
50%
40%
30%
20%
10%
0%
2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
-20%
-40%
UK equities
-60%
-80%
2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
CFOs remain positive on the outlook for corporate Chart 16. M&A and PE outlook
activity. Most expect activity in the M&A and private Net % of CFOs who expect M&A and PE activity to increase in the next 12 months
equity sectors to rise over the next year. As chart 13 on
Activity will increase
-20%
-40%
-60%
-80%
2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
49% 4
UK government Optimism on US, Japan: United States
47% total managed
The coming Treasury 3 pessimism on Europe
expenditure Japan
fiscal squeeze forecasts
45% Northern
2 Europe
43%
1 UK
41%
UK government
total receipts 0
39%
Peripheral
37% -1 Europe
35% -2
1990- 1993- 1996- 1999- 2000- 2005- 2008- 2011- 2014- Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10
1991 1994 1997 2000 2003 2006 2009 2012 2015
Source: The Economist poll and Deloitte calculations
Source: Emergency Budget forecasts, HM Treasury
Financial market rankings of major UK risks Spanish and German 10 year bond yields
40 1.5 Forecasts
UK corporate gearing declines 1.0
35 0.5
0
30
-0.5
20 -2.0
-2.5
15 -3.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
Debt net of liquid assets relative to the market value of capital
Source: Bank of England Financial Stability Report, June 2010 Source: ONS, Office for Budget Responsibility and Deloitte calculations
8
Data archive
A note on methodology
Many of the charts in the Deloitte CFO survey show the results in the form of a net balance. This is the percentage of respondents reporting, for
instance, that bank credit is attractive less the percentage saying bank credit is unattractive. This is a standard way of presenting survey data used
by, amongst others, the CBI and the European Commission. To aid interpretation of the results, this table contains a full breakdown of responses
to the questions covered in this report. Net balances have been rounded to the nearest whole number.
Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010
% % % % % % % % % % %
How would you rate the overall availability of new credit for corporates?
Available 26 31 16 5 1 2 13 11 19 24 31
Neutral 19 6 7 6 0 4 15 16 13 21 19
Hard to get 55 63 77 89 99 94 72 73 69 56 50
Net Balance -29 -31 -61 -84 -98 -92 -59 -63 -50 -32 -20
How would you rate the overall cost of new credit for corporates?
Costly 64 72 89 97 95 86 82 76 73 65 55
Neutral 26 25 10 2 4 11 15 18 16 24 31
Cheap 10 3 1 1 1 3 3 7 11 11 15
Net Balance 55 69 88 96 94 83 79 69 62 54 40
Bank borrowing, as a source of funding, is
Attractive 44 59 47 35 29 27 27 26 31 36 44
Neither attractive nor unattractive 28 16 13 14 9 12 22 27 26 32 36
Unattractive 28 25 40 51 62 61 50 48 43 31 20
Net Balance 16 34 7 -16 -33 -34 -23 -22 -12 5 23
Corporate debt raising, as a source of funding, is
Attractive 33 28 40 14 20 22 35 48 58 56 46
Neither attractive nor unattractive 33 19 29 17 14 23 32 33 29 34 35
Unattractive 33 53 31 68 66 55 34 19 13 10 20
Net Balance 0 -25 8 -54 -46 -33 1 28 44 46 26
Equity raising, as a source of funding, is
Attractive 19 19 29 17 21 27 44 50 48 38 30
Neither attractive nor unattractive 33 9 20 24 13 28 26 26 28 36 34
Unattractive 48 72 51 58 66 45 30 24 23 27 37
Net Balance -29 -53 -22 -41 -45 -18 14 26 25 11 -7
UK corporate balance sheets are
Overleveraged 5 13 32 33 38 63 50 39 40 29 26
Appropriately leveraged 73 81 61 61 59 34 44 57 56 64 64
Underleveraged 22 6 7 6 3 3 5 4 5 7 10
Net Balance -17 6 24 27 35 60 45 34 35 22 16
Cash return to shareholder ratios (including share buybacks) are
High 35 32 17 15 25 15 9 6 5 7 10
Normal 60 52 56 39 26 13 22 26 29 26 32
Low 5 16 27 45 49 72 68 68 66 68 58
Net Balance 30 16 -10 -30 -24 -57 -59 -62 -61 -61 -48
In a year’s time, FTSE 100 will be
Higher 30 50 40 49 66 65 61 38 45 48 55
Broadly unchanged 40 25 33 35 26 23 34 49 42 40 35
Lower 30 25 28 16 8 12 4 13 13 12 10
Net Balance 0 25 12 33 58 53 58 26 31 36 45
Levels of M&A in the UK will
Increase 21 31 38 48 40 56 83 92 91 84 79
No change 14 16 26 27 36 29 15 8 9 16 20
Decline 65 53 37 26 24 15 2 0 0 1 1
Net Balance -44 -22 1 22 16 41 81 92 91 83 78
Volume of acquisitions by private equity in the quoted equity market will
Increase 12 22 32 31 20 29 40 50 58 55 56
No change 5 6 23 30 33 37 40 45 36 38 36
Decline 84 72 45 39 47 34 21 6 6 7 7
Net Balance -72 -50 -13 -8 -27 -5 19 44 52 48 49
Compared with three months ago how do you feel about the financial prospects for your company?
More optimistic 17 22 17 3 7 15 37 46 46 48 35
Unchanged 43 47 47 41 27 40 49 46 52 44 52
Less optimistic 40 31 36 56 66 45 15 8 2 8 12
Net Balance -24 -9 -19 -53 -59 -30 22 38 44 40 23
Below are Thomson Reuters Datastream mnemonics for the net balances for all the regular questions from the Deloitte CFO survey.
For a full breakdown of all the regular data from the Deloitte CFO survey, please search on Datastream under “Deloitte” and “CFO”. A pdf with
the data from the survey is also available each quarter at www.deloitte.co.uk/cfosurvey
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