Optimism up but Brexit remains CFOs’ top concern

Optimism among the UK’s largest businesses has rebounded to the highest level in 18 months but CFOs will enter 2017 with low levels of risk appetite, high levels of uncertainty and a focus on defensive balance sheet strategies.

That’s the latest analysis from Deloitte, which saw 119 CFOs of FTSE 350 and other large private companies participate in its Q4 2016 CFO Survey.

It was revealed that 27% of CFOs say that they are more optimistic about the prospects for their companies, up from 16% in the previous quarter and 3% immediately after the referendum.

Twenty-two per cent say they are less optimistic than they were three months ago, making this the quarter the first since Q2 2015 where a net balance of CFOs were more optimistic than not.

Increased optimism comes despite levels of uncertainty remaining above normal. Eighty-nine per cent of CFOs say they face high levels of economic and financial uncertainty, up slightly from 88% in the previous quarter but down from 95% in the immediate aftermath of the EU referendum.

Similarly, levels of risk appetite remain muted and well below average, with 80% of CFOs saying now is not a good time to take risks onto their balance sheets, down from 82% in Q3 and 92% after the referendum.

The outlook for hiring and capital expenditure improved in Q4 but, on balance, CFOs see corporate spending decreasing in 2017.

Forty-six per cent say they expect capital spending to decrease in the next 12 months, down from 58% in Q2, while 48% expect hiring to slow, down from 83% in Q2.

Overall, CFOs remain focused on defensive balance sheet measures with 45% saying cost reduction is a strong priority for 2017 and 41% planning to increase cash flow.

The effects of Brexit remains the top concern for CFOs, on a scale of 0-100 they rate it at 62, up from 57 in Q3. This is followed by weak demand in the UK (55), tightening monetary conditions in the UK and US (53) and weakness in the euro area (52).

Overall, 66% of CFOs believe that the long-term business environment will be worse if the UK leaves the EU – broadly unchanged from 65% in Q3 and 68% in Q2 – while 14% believe the business environment will be better as a result.

Looking at the effects of Brexit on corporate spending, the dampening effect of the decision to leave the EU has eased somewhat since the immediate post referendum low. Thirty-five per cent of CFOs say that their own capital spending will decrease because of Brexit, down from 58% in Q2, 39% say their hiring will slow, down from 66%, and 19% says M&A activity will be weaker, down from 40%.

Ian Stewart, chief economist at Deloitte, said: “Buoyed by a backdrop of continued UK growth, CFOs have become markedly more positive on the outlook for their businesses and enter 2017 in better spirits than at any time in the last 18 months.

“However, rising optimism does not represent a return to business as usual. Uncertainty in the external environment continues to keep a lid on corporate expansion. Risk appetite remains depressed and is well below average levels and corporates remain on a defensive footing, with cost reduction and building up cash as their top priorities.”