By Daniel Hunter
UK corporates enter 2013 in a more optimistic mood than they entered 2012, yet while sentiment has seen a positive shift, the strategies of large UK businesses haven’t significantly changed, according to the latest Deloitte CFO Survey published today (Monday).
While the primary concern for corporates a year ago was that the single currency could break up, such fears have receded. Optimism is up sharply from the lows seen at the end of 2011, and fears of a return to recession or a euro breakup, have eased. The probability of a euro break-up within the next 12 months is rated at 22% compared to 37% a year ago.
The Q4 Deloitte CFO Survey gauged the views of chief financial officers (CFOs) and finance directors from 112 major companies, including 36 FTSE 100 and 38 FTSE 250 businesses, about the appropriateness of UK government policy for business. Monetary policy, which includes interest rates, inflation and the availability of credit, received the strongest vote of confidence, with a net 81% of finance chiefs rating it as appropriate.
CFOs are also far less worried about company-specific worries such as margins, cash flow and credit availability. Large companies enter 2013 with healthy balance sheets and benign financing conditions. In Q4 2012 CFOs reported a sharp decline in credit costs and now rate credit as being cheaper than at any time in the last five years. Just 4% of CFOs and finance directors surveyed cited the cost of and difficulty in raising finance as being major worries for their businesses.
“Despite expectations of a weak recovery in 2013 large companies enter the New Year with a greater focus on cost control and cash flow than at any time in the last two years," Ian Stewart, chief UK economist at Deloitte, commented.
"The emerging picture is of businesses which are constrained by low growth and uncertainty rather than weakness in business models or access to capital. Despite confidence fluctuating with the ups and downs in economic prospects, we’ve seen a long term drift to greater defensiveness by corporates not for want of capital but rather for scarcity of opportunity.
“The dominant concern of UK businesses for 2013 is the economy, just as it has been at the start of each of the last four years. Confidence has returned, but perceptions of economic and financial uncertainty remain high and the greatest worries for CFOs are still the weakness of the euro area and UK economies.
“Yet corporates have not closed the door to growth. About half of CFOs think that troubled times create opportunities to take market share and expand capacity or to implement overdue change within the business. Big businesses are also more positive about undertaking capital expenditure than they were a year ago. The difference now is that such opportunities are more selective. CFOs cannot rely on the upward escalator of steady growth to lift revenues. They have to work harder for, and carefully judge, the risks of expansion.”
While corporate Britain is not banking on a positive macro environment to deliver growth, by and large major companies think the Bank of England is doing a good job and CFOs are also positive about the UK’s labour market policies.
It is the micro side of the economy which finance chiefs believe needs attention in order to create a better environment for the long-term success of business. The areas of greatest concern relate to micro issues, such as regulation, infrastructure, energy and immigration policy, rather than macroeconomic policy. For large UK businesses it is the micro side of the economy, rather than monetary policy, which needs attention.
A net 81% of CFOs surveyed rated monetary policy as being appropriate for the long-term success of business in the UK, with 76% considering labour market policy to be appropriate. In contrast, general levels of regulation affecting business (-9%) was considered to be the least appropriate area of policy for long-term business success. Infrastructure (16%), energy policy (19%) and immigration policy (20%) were the other biggest areas of concern.
Ian Stewart concludes: “While CFO sentiment yo-yoed in 2012, largely in response to the ups and down of the euro zone, corporate strategies have become steadily more defensive over the last year. By and large big corporates do have the firepower to hire and invest. However, five years on from the onset of the financial crisis the missing ingredient, and the one which holds the key to corporate behaviour, is confidence about future growth.”
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