Deloitte CFO Survey shows corporates turn defensive

Mounting uncertainty about the global economic outlook has seen optimism among the chief financial officers of major UK businesses fall for the third quarter in a row. According to the latest Deloitte CFO Survey, optimism is at its lowest level since early 2009, when the UK was in recession. Forty three per cent of CFOs believe that the UK will fall back into recession, up from 33 per cent last quarter.

The proportion of CFOs who say external financial and macroeconomic uncertainty is “high” or “very high” has almost doubled to 46 per cent from 26 per cent in the previous quarter.

The weaker and more uncertain backdrop has also dented corporate appetite for risk. After peaking in the first half of 2011, risk appetite has fallen at its fastest rate since the Deloitte CFO Survey began in 2007. Risk appetite is lowest in the financial sector and highest in the consumer goods and technology sectors.

The shift in risk aversion has led to a tilt in balance sheet strategies employed by CFOs. For the first time in a year cost control is the top priority for CFOs and capital expenditure and acquisitions have taken a back seat.

Margaret Ewing, a senior Deloitte partner and former FTSE 100 CFO, commented: “This quarter’s CFO Survey shows that uncertainty and weaker growth have had a marked effect not just on corporate sentiment but also on priorities. The world has become riskier and more uncertain for corporates. Most think that a period of margin expansion is drawing to an end. CFOs are responding with a renewed focus on cost control. Expectations of a revival in corporate capital spending and hiring are fading.”

Ian Stewart, chief economist at Deloitte, added: “There is a clear distinction between UK and internationally focussed corporates. Companies which derive 70 per cent or more of their revenues from outside the UK still see expansion as their top priority. Nonetheless, even among this group defensive strategies such as reducing costs and increasing cashflow have gained importance.

“Companies which derive 70 per cent or more of their revenues from the UK are positioned more defensively, prioritising cost reduction and raising cashflow.

“It’s a case of overseas expansion and domestic caution. The bottom line is that finance chiefs see the greatest opportunities for growth lying outside the UK. For UK big businesses, defensive strategies are, once again, to the fore.”

The uncertain economic outlook has made CFOs more cautious about corporate expenditure. While CFOs entered 2011 anticipating that corporate hiring and investment would rise over the coming year, the majority now expect hiring and investment to decline over the next 12 months.

Mr Stewart continued: “Finance chiefs have become more bearish on the outlook for profits. Most see profit margins contracting over the next year, a marked change from the optimism we saw in profits a year ago”.