UK: The Deloitte CFO Survey: 2015 Q1

Election Casts A Long Shadow Over Corporates

Uncertainty over post‑election policy change represents the greatest threat to UK business according to the Chief Financial Officers of the UK's largest companies. CFOs rank a referendum on EU membership as the second greatest risk facing their businesses, followed by concerns over weakness and political instability in the euro area.

Risk appetite appears to have decoupled from its usual drivers, the economic outlook and equity market performance. Sentiment about growth in the US, UK and the euro area has improved since the previous CFO Survey in December. And the FTSE100 rose by 14% between mid‑December and late March to reach an all‑time high.

Yet political worries and the threat of a renewed euro crisis seem to have offset the impact of generally good economic news and buoyant equity markets, dragging down corporate risk appetite to a two‑year low. CFO expectations for investment spending have also dipped.

Last September, as CFO risk appetite reached its peak, a majority of CFOs rated government policy as being appropriate across ten separate areas.

The highest levels of satisfaction, with scores of 90% or more, went to monetary policy, the labour market and taxation. On average 77% of CFOs rated policy as appropriate, up from 67% in 2012.

This quarter's survey shows that CFOs think the General Election poses risks to what is seen as a benign policy environment. A clear majority of CFOs see the potential for adverse changes on regulation and taxation. And, on balance, the expectation is that post‑election changes will be negative for fiscal, monetary and labour market policies. Meanwhile the risk of a future referendum on EU membership ranks not far below the General Election itself as a threat.

Corporate hiring and investment has led the recovery in the last two years. Yet this quarter's CFO Survey demonstrates that business‑hostile policy change remains a potent threat to the recovery. The last seven years have provided ample evidence of the corrosive effects of uncertainty on corporate behaviour. A weakening of corporate risk appetite and investment intentions provides an ominous reminder that the business recovery is not assured.

Uncertainty up

CFO perceptions of economic and financial uncertainty rose again in the first quarter.

63% of CFOs now rate the level of uncertainty facing their businesses as above normal, high or very high – the highest reading in almost two years.
Rising uncertainty has coincided with a continued reduction in risk appetite, which is now at a two‑year low.

51% of CFOs say that now is a good time to take greater risk onto their balance sheets, down from a record high of 72% six months ago.
This fall in risk appetite appears to be driven by CFO concerns over policy change after the General Election, as highlighted in Chart 1.

Corporates see the current policy environment as fairly benign. Last September, as risk appetite hit a record high, a majority of CFOs rated UK government policy as appropriate across ten areas.

More than 90% of them reported policy settings as appropriate for labour market, taxation and monetary policy

Policy change key concern

CFOs believe that the General Election poses risks to what is seen as a generally benign policy environment. A clear majority of CFOs see the potential for adverse changes on regulation and tax. And, on balance, the expectation is that post‑election changes will be negative for fiscal, monetary and labour market policies.

At the same time, CFOs anticipate that changes to policy on infrastructure, education and training, and urban and town planning would be beneficial for their businesses.
The rise in uncertainty over UK economic policy is also reflected in an uptick in press references to economic policy uncertainty.
Developments in Europe have also weighed on corporate risk appetite.

Despite recent improvements in the economic outlook for the euro area, political wrangling over Greek austerity and debt repayments has kept the euro crisis in the headlines.

The probability of a Greek default – as inferred from the cost of insuring against this event – has risen sharply this year.

Defensive strategies in favour

Defensive strategies – increasing cash flow and reducing costs – remain the top priorities for CFOs.

Compared to the fourth quarter of last year CFOs are placing less emphasis on expansionary strategies such as introducing new products or services, expanding by acquisition and capital expenditure.
CFOs have scaled down their expectations for growth in capital spending.

A net 53% expect UK corporates to increase capital expenditure over the next 12 months, down from a peak of 80% a year ago.

Uncertainty weighing on investment plans

Chart 10 compares the effect of nine key factors on corporate investment plans between the first quarter of last year and now. The further a coloured line in the chart is from the centre, the more the factor acts to support investment.

Uncertainty is the biggest, and a growing, depressant on investment.

The main drivers of investment are easy access to external financing, a strengthening UK recovery and rising demand for businesses' products and services.

To read this Survey in full, please click here.

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