Rising equity markets, “exceptionally easy” monetary policy and improving financial conditions have contributed to a more positive mood among major UK companies as confidence among chief executives officers improved for a third consecutive quarter.
Deloitte’s Q1 2013 CFO Survey, which gauges the views of 120 chief financial officers, including those from 26 FTSE 100 and 44 FTSE 250 companies, shows that principal officers’ perceptions of macroeconomic and financial uncertainty have dropped to the lowest level for two-and-a-half years – 23 per cent say their business faces a high level of external uncertainty. That is the lowest level since the second quarter in 2011.
Despite the bailout of Cypriot banks last month, CFOs have become more confident that the euro area will hold together. They believe there is only an 18 per cent chance that the euro will break up in the next 12 months, half the level (36 per cent) seen in the second quarter last year.
Corporate risk appetite is rising: 34 per cent of CFOs say now is a good time to take risk on to their balance sheets, compared to 25 per cent in the last quarter of 2012 and 13 per cent in the final quarter of 2011.
Credit conditions for large companies have improved for the third consecutive quarter. Over two-thirds (69 per cent) of CFOs say that credit is more readily available, 60 per cent rated credit as cheap and 67 per cent say that bank borrowing is an attractive source of lending, the highest levels recorded since the CFO Survey started in Q3 2007.
The economic uncertainty of recent years has led CFOs to adopt defensive balance sheet strategies such as cost control and increasing cash flow. But in the first quarter, CFOs have reduced the emphasis on these strategies. The proportion of CFOs prioritising cost control dropped from half in the tail end of 2012 to 42 per cent between January and March this year. Those prioritising raising cash flow dropped from 49 per cent to 39 per cent.
“Despite the gloomy coverage around the UK Budget and the crisis in Cyprus, CFOs believe that the level of economic and financial risk facing their businesses has declined,” Deloitte chief economist Ian Stewart said this week. “Corporate appetite for risk is not far off the peaks seen in early 2011 when Europe looked set for a sustained recovery.”
Mr Stewart added that reduced stress in financial markets, especially in the euro area, has delivered improvements in credit conditions for large UK corporates. It is a measure of the change that CFOs now rate bank borrowing as offering a more attractive form of finance than at any time since the start of the financial crisis, he said.
“CFOs have had to adapt to high levels of macro uncertainty in the last five years, which has had a pronounced effect on the way businesses are run. Sustained declines in uncertainty offer the prospect of stronger corporate activity to come. Our index of corporate defensiveness, having trended higher for two-and-a-half years, has declined sharply.”
This is the 23rd quarterly survey of chief financial officers and group finance directors of major companies in the UK; 120 CFOs participated, including CFOs of 26 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 69 UK listed companies surveyed is £671 billion, approximately 32 per cent of the UK quoted market.