Why CFOs are confident in the US economy

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  • Key findings

    Why CFOs have increased confidence in the US economy

    Tom McGrath, EY Americas Senior Vice Chair – Accounts

    A note from Tom McGrath, EY Americas Senior Vice Chair – Accounts

    CFOs continue to be optimistic about the US economy, but less so than at the end of 2013, according to the latest CNBC Global CFO Council poll, which is sponsored exclusively by EY. New data show that 67% of CFOs think the economy is improving, compared to 82% who felt this way at the end of last year.

    Why the decline in confidence? The lingering effects of a lackluster holiday season could be partly to blame: CFOs rank weakening consumer demand as their top external risk factor, ahead of US fiscal policy and emerging market economies. Recent regional crises also serve to remind us that geopolitical risks are always a concern for finance executives, who need to expect the unexpected.

    However, CFOs appear to be encouraged by two positive developments in Washington: the raising of the debt ceiling and the confirmation of Janet Yellen to lead the Federal Reserve. In fact, CFOs say that monetary policy and the debt ceiling no longer rank among their top 10 external risk factors, a marked change since last quarter.

    Savvy CEOs are taking this time to elevate their growth agenda. More of them are now seeking both organic and inorganic growth opportunities, and they are more confident in the market for deals. In the latest poll, 61% of CFOs say M&A activity is in line with historical averages — a significant improvement from December, when 70% reported below-average deal volume. For example, we are seeing many companies, including pharmaceuticals, life sciences and biotechnology, strategically repositioning themselves for growth.

    Companies that aren’t looking to acquire can still power transformational change through cost cutting and rationalization. CFOs need to ensure all company divisions are fit for purpose and fit for the future. By doing so, this enables them to invest in growth where it makes most sense — and possibly divest where it doesn’t.

    Indeed, this is a demanding time for CFOs, who need to drive efficiency in the present while keeping an eye out for future growth opportunities.

    “Savvy CFOs are taking this time to elevate their growth agenda.”
  • Confidence in economy takes a step back

    Only modest GDP growth expected

    In the first quarter of 2014, CFOs’ views of the health of the US economy regressed from the previous quarter. Two-thirds of CFOs see the economy modestly or strongly improving. At the end of 2013, 82% of CFOs said economic conditions were on the upswing.

    Optimism in GDP projections is similarly moderate. CFOs expect GDP growth to remain stable in most of the world, with modest improvements in North America, Africa and parts of the Middle East. Overall, roughly 45% of CFOs say the global economy is moving in the right direction, while 40% say it is merely stable.

    This mostly positive sentiment also aligns with the latest EY CFO Capital Confidence Barometer.

    Our periodic survey of senior executives from large global companies, conducted by the Economist Intelligence Unit, also shows reasons for cautious optimism. Sixty percent of CFOs surveyed see improvement in the global economy.

    However, there seems to be some uncertainty about how this growth will actually translate into improvement in specific components of the economy. When CNBC asked CFOs to rate the health of 10 different economic conditions, they reported that only four of them appear strong: cost of debt, credit availability, corporate earnings and stock market valuations. The rest were seen as stable.

    Q: What is your perspective on the overall economy today?
    EY - What is your perspective on the overall economy today?
    Q: Your current expectations for US GDP growth in 2014?
    EY - Your current expectations for US GDP growth in 2014?
    Q: Rate the health of the following US economic conditions
    EY - Rate the health of the following US economic conditions

    76% of CFOs feel that the US economy is modestly improving.

    Cost cuts, customer retention are priorities

    As CFOs are cautiously optimistic about the US economy, they are becoming more buoyant about the fortunes of their own organizations. More than 70% expect their earnings per share to rise in the first quarter of 2014, indicating their rising prospects for profitability. Similarly, the latest EY CFO Capital Confidence Barometer shows that 55% of finance executives say their companies are focused on growth, the highest figure since October 2011.

    CFOs say that two of their most important sources of growth are cost reduction and retaining existing customers. Perhaps this reflects the relatively risk-averse nature of many finance executives. But this also surfaces the question: How sustainable is growth via cost cutting and customer retention? In contrast, fewer CFOs cited as priorities dynamic, potentially game-changing growth strategies — growth strategies like emerging markets investments, opening new lines of business and M&A.

    “CFOs do tend to be more conservative than their C-level counterparts,” says McGrath. “Running a corporation is a team sport. And CFOs usually play a key balancing role.”

    Aside from moderate improvement in the US, CFOs see stability, not economic growth, on the world stage in 2014.

    Q: What is your view of your firm’s 1Q14 EPS growth versus 1Q13?
    EY - What is your view of your firm’s 1Q14 EPS growth versus 1Q13?
    Q: Your firm’s most important source for growth in 2014?
    EY - Your firm’s most important source for growth in 2014?

    17.6% of CFOs see customer retention as their most important growth engine.
  • Recovery hinges on consumer demand and government debt

    Emerging market economies closely watched

    Concerns about weakening consumer demand may be to blame for CFOs’ less optimistic economic outlook. Retail sales varied in 2013, with only modest holiday sales, and overall retail sales grew 4.2%, the smallest gain in 4 years, according to the U.S. Department of Commerce.

    Viewpoint:
    Supply chain vital to efficiency and growth

    Washington’s moves are also seen as major risks. CFOs cited US fiscal policy as a primary concern. This despite the fact that for the first quarter of the government’s fiscal year the deficit was actually 40% smaller than it was in the first quarter one year ago. Federal Reserve policy – ranked the fourth-biggest risk factor in the last poll – no longer ranks in the top 10, as Janet Yellen has succeeded Ben Bernanke as Chair of the Federal Reserve with little debate or controversy.

    CFOs still have strong opinions about what the Fed should do; 83% say it should not pause its plans to taper quantitative easing.

    Q: Please rank in order the following choices, from the largest to the smallest external risk factor, currently faced by your business:
    EY - Please rank in order the following choices, from the largest to the smallest external risk factor, currently faced by your business
    Q: Should the Federal Reserve pause its plans to taper quantitative easing?
    EY - Should the Federal Reserve pause its plans to taper quantitative easing?

    83% of CFOs think the Fed should continue to taper QE.
  • Critical issues at the board level

    Carefulness still top of mind

    Reflecting their cautious optimism in the economy, CFOs report that carefulness continues to be a critical issue at the board level. Risk management is the second-most important corporate governance issue, and cost controls are tied for third-most important. This trend has been consistent for months. In the most recent EY CFO Capital Confidence Barometer, financial executives saw a greater emphasis on risk management and efficiency/cost control among their boards. In fact, 73% of CFOs reported that their boards had a greater emphasis on risk management than they did 12 months prior.

    “CFOs are increasingly aware that they should be more involved in corporate governance discussions with their institutional shareholders, because these issues connect closely with a company’s performance and strategy. CFOs know these discussions can certainly influence the way shareholders vote.” —Allie Rutherford, Director, EY Center for Board Matters, Ernst & Young, LLP
    Q: Rank, in order of priority, the following corporate governance issues
    EY - Rank, in order of priority, the following corporate governance issues
  • Cyberattack anxiety escalates

    Spending to improve cybersecurity

    CFOs seem to be taking cybersecurity more seriously than ever, as high-profile attacks in recent months have put companies on the defensive. Cybersecurity ranks in the top five external risk factors cited by CFOs in the latest CNBC Global CFO Council poll.

    Viewpoint:
    Cyberthreat challenges are here to stay

    About two-thirds of CFOs are either highly concerned or concerned about a cyberattack, and they’re responding aggressively. Three quarters of CFOs say that they will increase spending on cybersecurity in 2014.

    These plans should also cover ways to detect an attempted cyberattack. For many companies, an attack is inevitable — so detection may be the best prevention. “The key to detection is executing a plan for monitoring transaction activity that leads to continual investigations to locate potential cyberattacks,” says Terry Jost, Partner and Advisory Risk Technologies Leader at EY. “CFOs should help lead and ensure such plans are manifested to provide the best mechanisms for protecting critical assets and manage cyber vulnerabilities.”

    Q: Concern that your firm could fall victim to a cyber attack
    EY - Concern that your firm could fall victim to a cyber attack
    Q: Your firm’s spending plan on cybersecurity in 2014?
    EY - Your firm’s spending plan on cybersecurity in 2014?

    36% of CFOs plan to significantly increase cybersecurity spending.

    Viewpoint

    Cyberthreat challenges are here to stay


    Perhaps no other business issue has captured more headlines recently than cybersecurity. Heavily publicized attacks have garnered attention from the newsroom and the boardroom to livings rooms around the world.

    CFOs should not see cybersecurity as just a trend –Y2K bug, anyone? “This is not a short-term issue. This is here to stay,” says Terry Jost, Partner and Advisory Risk Technologies Leader at EY. “In fact, this is a challenge that is only going to accelerate and grow as the global economy becomes increasingly digital.” In fact, Jost adds, CFOs can expect more policies designed to protect consumers in light of recent events.

    CFOs are wise to be concerned about cybersecurity. More and more, investors and other stakeholders who are concerned about a company’s financial risks are asking finance executives what they are doing to protect their assets. So how should a CFO approach their cybersecurity spend?

    “They should look at what matters most to the business, what would be most devastating if it were compromised – and invest appropriately,” says Jost. “What’s interesting is that what matters most to the company might not be evident to outside stakeholders, like investors.” For example, a technology company’s treasured R&D data, kept secret from outsiders, might be its most important asset. Alternatively, a manufacturer might consider the health and safety of its employees as paramount.

    When an organization has identified its most critical components, it can then work backward, focusing on how a cyberattack might occur. This scenario-planning process should have an operational point of view, encompassing all the necessary steps to follow if and when a breach happens.

    These plans should also cover ways to detect an attempted cyberattack. For many companies, an attack is inevitable, so detection may be the best prevention. “The key to detection is having a plan to monitor transaction activity that leads to continual investigations to locate potential cyberattacks,” says Jost. “CFOs should help lead and ensure these plans are followed, and that they provide the best mechanisms for protecting critical assets and managing company cyber vulnerabilities.”

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  • Where are the mergers and acquisitions?

    Deal activity finally rebounding

    CFOs are more confident in the market for deals than they were at the end of 2013. In the latest poll, 61% of CFOs say deal activity is in line with historical averages, while just 22% say it is below average. In December, roughly 70% of CFOs said deal activity was lower than usual.

    Viewpoint:
    Deal-making: high-growth companies on the lookout

    Interestingly, the latest EY CFO Capital Confidence Barometer shows that two-thirds of CFOs actually expect global dealmaking to increase.

    “When it comes to M&A, CFOs are looking at deals in the future — tomorrow, not today. So we hope to see volume increase later in 2014” says McGrath. “Granted, many CFOs are ready to move if they see the right transaction. But there are still some concerns out there, particularly around valuations.”

    Q: Tempo of deal activity at your firm vs. historical average
    EY - Tempo of deal activity at your firm vs. historical average
    Q: What is the current tempo of deal activity at your firm?
    EY - What is the current tempo of deal activity at your firm?

    35% of CFOs report that their pace of deal-making remains low.

    Viewpoint

    Deal-making: high-growth companies on the lookout


    The latest CNBC Global CFO Council poll, which is exclusively sponsored by EY, suggests a rebound in M&A activity. “High-growth companies,” in particular, are looking at dealmaking to transform their companies and drive growth and innovation, as they are generally more bullish, agile and entrepreneurial than other businesses.

    “For a long time, we have seen what we term the ‘confidence paradox,’ with many companies holding cash and having access to financing, but being reluctant to make deals,” says Herb Engert, Americas Leader, Strategic Growth Markets at EY. “Today, confidence is growing, and many high-growth companies are especially optimistic. They are putting M&A front and center.”

    The role of the CFO in high-growth companies is changing — and becoming more challenging.

    The role now demands more rigor, especially in private companies that intend to go public. At the same time, opportunities can arise for these CFOs to take their place at the center of transformative activities — including dealmaking.
    “One aspect of this work is dealing more closely with private equity (PE) investors,” says Engert. “CFOs can collaborate with their PE partners to transform finance and operations to drive growth.” A healthy relationship with a PE investor will bring a company more business contacts and help evolve its products to meet the needs of new markets and/or geographies. Of course, all of this empowers the PE investors’ ultimate goal: a liquidity event.

    A CFO can also help lead an organization’s timing of a sale. “In today’s environment, many venture capital-backed companies seem to be built to sell, implying that they may be selling too quickly,” says Engert. “Smart finance executives are pointing out that these organizations may be leaving money on the table.” Instead, CFOs are seeking more support from the capital markets to drive product development and entry into new markets, and enhance growth. This can dramatically increase presale valuations, and requires more focus by the CFO on building rigor into the finance function.

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  • About this paper

    About this paper

    CFO: need to know is a regular EY paper featuring highlights of polls conducted by CNBC of the CNBC Global CFO Council. The CNBC Global CFO Council represents an elite group of CFOs that will share their views on key issues and challenges for today’s CFOs. Views expressed in this paper are solely those of EY and do not represent the views of CNBC, the CNBC Global CFO Council members or their employers.