Shift towards increased corporate leverage as credit conditions improve.
April 9, 2014 : Shift towards increased corporate leverage as credit conditions improve.
Greater confidence about growth in the UK and euro area is supporting corporate investment, according to the latest Deloitte CFO Survey.
The first quarter 2014 CFO Survey gauged the views of 126 CFOs, including 27 FTSE 100 and 45 FTSE 250 companies.
Rating a range of factors affecting investment, UK and euro area growth have seen the sharpest improvements in the last six months. In a reversal of recent thinking, CFOs now see UK growth as a greater driver of investment than activity in emerging markets.
A net 95% of CFOs said that prospects for economic activity in the UK have improved over the last six months, 70% said that the outlook in the USA has improved and 54% believed the euro area has improved. However, the net percentage for emerging markets and developing economies was -52%.
Deloitte’s latest CFO Survey finds:
- CFOs’ appetite for risk has risen for the seventh consecutive quarter and is now at its highest level for six-and-a-half years. 71% of CFOs say now is a good time to take greater risk onto their balance sheets, one of the largest quarter-on-quarter rises on record and double the level of a year ago;
- Perceptions of economic risk have plunged in the last year. 52% of CFOs say the level of economic and financial uncertainty facing their business is above normal, high or very high, down from 77% in Q1 2013
- A net 81% of CFOs expect UK corporates to increase hiring in the next 12 months, 80% expect increases in capital expenditure and 36% predict a rise in discretionary spending. These are the highest levels in three-and-a-half years;
- A record 95% of CFOs expect M&A activity to rise over the next year;
- A net 31% of CFOs are more optimistic now about their company’s financial prospects than three months ago, close to the highest level in four years;
- CFOs say credit is cheaper and more easily available than at any time in the past six-and-a-half years;
- There is an increasing perception among CFOs that companies have scope to raise leverage. 37% of CFOs say corporate balance sheets are underleveraged. The proportion of CFOs who say that corporate balance sheets are overleveraged has dropped from a peak of 63% in Q1 2009 to a record low of 2% in Q1 2014;
- CFOs are bullish on all forms of capital issuances: bank borrowing, equity issuance and bond issuance. Expectations for equity issuance and bank borrowing have seen a strong recovery in the last year. For the first time in more than three years, expectations for equity issuance are higher than for bond issuance;
- CFOs have become markedly more confident on the UK inflation outlook. 76% of CFOs expect CPI inflation to be running at 1.5%-2.5% in two years; time, in line with the Bank of England’s 2.0% target. In Q4 2013 45% expected inflation to be on target. The proportion of CFOs expecting very high inflation, of 2.5%-3.5%, has more than halved from 48% in Q4 2013 to 20% in Q1 2014;
- 43% of CFOs expect the Bank of England’s base rate to reach 0.75% within a year’s time. 20% expect this to reach 1% while 37% expect it to remain unchanged at 0.5%.
Ian Stewart, chief economist at Deloitte, said:
“The default position of large corporates in the past six years – bullish on emerging markets, cautious on developed markets – seems to be reversing. CFOs are now more confident about growth in developed economies, particularly the UK. CFOs increasingly see growth here in the UK, and established markets such as the US and euro area, as the key drivers of their corporate investment plans.
“CFOs foresee an increase in capital raising over the next year. Expectations for equity issuance and bank borrowing have risen sharply in the last year. Easy monetary policy and favourable financing conditions have created a capital-rich environment for big UK corporates. CFOs are likely to draw down on that capital over the next year to fund expansion.
“Strong risk appetite, along with positive readings on hiring and capital spending, supports the view that a surge in corporate spending will become a major driver of the UK recovery.”
Source: Director of Finance Online