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DELOITTE CFO SURVEY: EXPANSION IS BACK Chief Financial Officers (CFOs) of big businesses are turning decisively toward expansion and growth according to the latest Deloitte CFO Survey. The third quarter 2013 CFO Survey, which gauged the views of 116 CFOs, including FTSE 100 companies and FTSE 250 companies, shows that optimism is close to a three year high.
62% of CFOs say that their business faces a high level of financial and economic uncertainty, down from a high of 97% in Q4 2011. CFOs see just an 8% probability of a country leaving the euro, down from 37% in Q4 2011.
For the first time since 2011 expansion is a higher priority for CFOs than cutting costs and building up cash.
CFOs are expecting growth in the UK and euro area to provide a boost to their investment plans. CFOs cited growth in the UK as one of the main factors supporting investment in the coming 12 months, ahead of growth in emerging markets or in the US and Asia.
29% of CFOs said that reducing costs is a strong priority for their business, with 35% saying the same about increasing cash flow, down from a peak of 49% in Q4 2012.
82% of CFOs expect UK interest rates to rise by 2015. CFOs are sceptical that the Bank of England’s new forward guidance policy will keep interest rates on hold well into 2016.
40% of CFOs say that introducing new products and services or expanding into new markets is a strong priority while expectations for hiring, capital expenditure and discretionary spending in the coming 12 months are also at a three-year high.
Ian Stewart, chief economist at Deloitte, said: “A new mood of confidence pervades the third quarter CFO Survey. Chief Financial Officers see fewer risks in the global economy and greater opportunities for expansion.
54% of CFOs said that now is a good time to take risk on their balance sheets, up from 45% in Q2 and the highest level recorded in six years.
“The defensive strategies of cost cutting and cash accumulation that saw corporates through the global financial crisis are increasingly out of favour. The priority
now is expansion and the balance-sheet cycle has turned decisively towards growth. “CFOs have become markedly more positive on prospects for growth in the developed world. There’s greater confidence too, that the euro will hold together. “Emerging markets are a vital source of demand but CFOs are also looking to Europe for expansion. In a reversal of the situation six months ago, CFOs believe that UK growth will have a more positive effect on their investment plans in the next year than growth in emerging markets or in the US, Japan and Asia Pacific. ”A record 54% of CFOs say that now is a good time to take risk onto their balance sheet. High levels of corporate cash and favourable credit conditions suggest that major corporates have the firepower to invest. “The mood among corporates has been transformed in the last year. This quarter’s survey reveals a broad-based optimism and a new focus on growth among the UK’s largest businesses.”
DEPOSITS GROWING AND LENDING SET TO RECOVER BUT AQR LOOMS LARGE FOR EUROZONE The return to growth in the Eurozone economy is fuelling a recovery in key drivers of profitability for financial services, with companies looking to borrow again and cash flow for households and businesses improving. But the road ahead is not without obstacles according to The EY Eurozone Financial Services Forecast (EEFSF). In particular, the upcoming Asset Quality Review (AQR) and the insurance industry’s vulnerability to changes in interest rates present challenges. Marie Diron, Senior Economic Adviser to the EEFSF, says: “The Eurozone has emerged from its longest recession in at least three decades and, although GDP is expected to fall by 0.5% this year, activity will gradually pick up. As a result the growth in supply and demand for financial services is starting to return.”
Andy Baldwin, Global Head of Financial Services at EY, adds: “Over the summer we saw signs that a sustainable economic recovery in the Eurozone may finally be underway. But a number of challenges remain before we will see a return to profitability and, more importantly, stability in financial services. Not least the unintended consequences and legacy of well-intentioned regulation.” After contracting for seven consecutive quarters, business investment is expected to pick up again this year. Improving GDP growth and credit conditions are gradually feeding an increased willingness to borrow. After a contraction of 2% in 2013, Eurozone banks are forecast to lend €4.6t to business in 2014 – 3.8% more than in 2012. Growth in business lending is forecast across all the major Eurozone economies in 2014. In Italy it is forecast to grow 3.8%, in Spain it will
grow 3.2% and in France and the Netherlands it is predicted to grow 2.7%. Signs that exports are at last beginning to revive will drive particularly strong growth in lending in Germany - 5% in 2014. Consumer credit conditions eased in Q2 2013 for the first time since 2007. Consumer lending is predicted to grow by 1.7% overall in 2013, but this growth will be centred in Germany and France, where lending will increase by 3% and 2.6% respectively. In Italy, Spain and the Netherlands lending to consumers will not start to grow until 2015. Residential mortgage lending is already expanding again this year in Germany, France and the Netherlands but not until 2014 in Italy and 2015 in Spain.
HEDGE FUNDS BACK IN THE BLACK WITH 1.05% GAIN, ON UPWARD TREND Hedge funds were back in the black in September as global markets trended upwards during the month. The Eurekahedge Hedge Fund Index was up 1.05% while global stock indices outperformed as the MSCI World Index gained 3.87% in September. Key highlights for September 2013: • Total assets in the hedge fund industry stand at US$1.91 trillion, set to cross the highest level on record by end2013 • Assets in long/short equity hedge funds crossed the US$600 billion mark for the first time since 2008 • Asia ex-Japan hedge funds have outperformed the underlying markets by more than 7% September yearto-date • Greater China focused hedge funds witnessed 3 months of positive returns, up 6.22% in the third quarter of 2013 • Distressed debt investing remains the best performing strategy in 2013, up 11.25% September year-to-date
ACQUISITION INTERNATIONAL
• Japanese hedge funds remained ahead of other regions, up 21.25% September year-to-date Regional Indices Global markets remained in headline-following mode during the month, rising in the first few weeks as the risk of a US strike on Syria declined. Positive macroeconomic data from Europe and China also pushed up market indices and the decision of the US Federal Reserve to maintain the pace of asset-purchase, added further strength to the rally. Markets declined in the latter half of the month as investor focus turned to the budget impasse in the US Congress. All regions posted positive returns for the month with emerging markets focused funds posting the strongest gains. Eastern Europe & Russia investing managers were up 5.2% in September while Asia ex-Japan managers gained 2.81%. Eastern European markets posted a remarkable 5.88% during the month while Asia ex-Japan markets also posted
excellent returns. The Hang Seng Index gained 5.19% in September, the Shanghai Composite grew 3.64% while in Indian the BSE Sensex gained 4.08%. For most of the year. the Eurekahedge Asia ex-Japan Hedge Fund Index has outperformed underlying markets and is up 5.90% September year-to-date, while the MSCI Asia Pacific exJapan is down 1.14% over the same period. Japanese hedge funds also posted strong returns in September, up 2.69% as the Nikkei 225 - after four months of negative returns - witnessed a strong rally during September, fueled by global trends as well as Tokyo’s winning bid to host the 2020 Summer Olympics. The Eurekahedge Japan Hedge Fund Index is up 21.25% September year-to-date. European, Latin American and North American funds were all up 1.43% on average in September.
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