CFO: need to know | Insights for CFOs

CFOs cautiously confident in global recovery

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The quarterly CNBC Global CFO Council polls provide a snapshot of how CFOs from some of the world's leading companies are responding to global events, macroeconomic changes and emerging business issues, and how they see this impacting their organization's strategies.

Here, Tom McGrath, EY Americas Senior Vice Chair – Accounts, Jay Nibbe, EY Global Accounts Chair and Annette Kimmitt, EY Asia-Pacific Accounts Leader, share their insights on the latest set of results.

  • Global economy improving

    As the global economic recovery gathers momentum, there is growing confidence in the boardrooms of the world’s largest companies. Among the members of CNBC’s Global CFO Council, 63% say that the global economy is improving, while 29% say that it is stable and just 8% think it is declining.

    Tom McGrath, EY Americas Senior Vice Chair – Accounts, says that this finding reflects a more stable environment for business, particularly in the US.

    “A year ago, there was greater uncertainty over monetary policy and the US fiscal cliff, quantitative easing was coming to an end and growth was starting to weaken in emerging markets,” he says. “With the recovery under way, now is the time for companies to be bolder in their investments and to make a move, albeit on a selective basis.”

    Currently, however, many CFOs remain cautious, despite the improving external conditions. This probably reflects a sense that the recovery is still fragile – which raises questions for companies about where to invest.

    “Globally, there seems to be some wind in the sails for certain economies, but I do think it’s uneven,” says Jay Nibbe, EY Global Accounts Chair. “Certainly, clients are concerned about where they place their bets when you have that kind of inconsistent economic recovery.”

  • Improving financial and market conditions are vital to recovery

    CNBC Global CFO Council members point to an improving financial and market situation as an important foundation of the recovery. Almost 80% say that availability of credit is strong – a result that was corroborated by our latest CFO Capital Confidence Barometer, which showed that 87% of CFOs see the market for credit as stable or improving. Council members also have a positive view of the cost of debt (63%) and stock market valuations (61%).

    Mr. McGrath highlights that the US has a supportive monetary climate, which has helped the recovery gain traction. The transition to Janet Yellen as the new Chair at the Federal Reserve and the beginning of tapering of quantitative easing have proceeded smoothly, and interest rates remain low.

    M&A deal flow also appears to be increasing: some 49% of respondents said that it was strong in their sector. According to the CFO Capital Confidence Barometer, more than one-third of CFOs (36%) predict that acquisitions will provide between 25% and 50% of their overall revenue growth in the coming year.

    Another 4% expect deals to account for more than half of top-line growth. Improved financial conditions, along with strengthening economic growth, are helping to encourage a revival of M&A activity, albeit from a low base.

    “There’s clearly been a pickup of interest in looking at deals,” says Mr. Nibbe, citing as an example the life sciences sector, including the asset swap between GSK and Novartis, as well as Pfizer’s bid (albeit unsuccessful) for AstraZeneca.

    “I think this is just the cusp of a lot of reshuffling, partly because companies are trying to realign their business, partly because many are still sitting on cash.”

  • GDP growth uneven around the world

    The majority of CFOs see GDP growth over the next six months as improving – or at least stable – in most regions, with greatest confidence in the US and Canada, Western Europe and Asia-Pacific, excluding China and Japan. The picture is more uncertain for Latin America, with 24% each for “improving” and “declining” and 16% unsure.

    For Russia and Eastern Europe, two-thirds of respondents expect a decline. Overall, then, there is optimism about the outlook for developed economies, but the outlook for emerging markets is seen as mixed.

    The pattern is similar for overall business environments. CFO Council members are most positive about the US and Canada, Western Europe and Asia-Pacific, excluding China and Japan, with over half of CFOs expecting an improvement in each case, and most of the rest seeing things as stable.

    They are distinctly negative for Russia and Eastern Europe (68% of respondents expect the business environment to deteriorate), and mixed for other emerging market regions.

  • Risks vary from region to region

    CFOs overall see the uncertain outlook for emerging markets as the biggest risk to their business, closely followed by high unemployment and weak consumer demand. Increasing tensions between Russia and the West and softer growth in China are not far behind.

    Interestingly, terrorism is well down the list, level with natural disasters – suggesting perhaps that it is now factored in by business as part of the normal order of things.

    Despite concerns about the outlook for emerging markets, it is important to take a long-term view and remain committed to these economies, despite their recent weakening. Annette Kimmitt, EY Asia-Pacific Accounts Leader, argues that slowing growth in China, in particular, should not be a matter of great concern.

    “Growth has come down slightly, but China still represents a significant opportunity,” she says. “As China transforms itself to a more consumer-led economy, there will be significant opportunities for companies that have made long-term investments in the region.”

  • IT tops capital expenditure priorities

    Asked about their top priorities for capital expenditure, CFO Council members point to IT as their number one area of focus. New equipment, upgrades of existing assets and R&D also feature prominently.

    Property and new manufacturing plants come toward the bottom of the list. This all adds to the impression that companies are seeking to take advantage of the recovery by boosting efficiency, within continued cost constraints, rather than investing in new physical capacity.

    There are a number of reasons for the importance of IT spending. Mr. McGrath highlights big data and digitization.

    “In the past two years, more data has been created than in the history of mankind and that's expected to continue to increase. Companies are looking at how they create better customer experiences, better insights through data analytics, and less of a focus on legacy transaction process systems.”

    Why it's right for digital to be an investment priority for CFOs

    Digital technology has transformed many companies and industries in the last few years, and the second tidal wave of change is coming.
    Companies that have so far kept digital at the periphery of their business, will soon be disrupted by competitors that are allowing digital to redefine their strategy, increase efficiencies, invent new products and services, improve customer experiences and better understand and predict market sentiment.
    Watch EY's leaders discuss why CFOs need to know: Digital.

    Investment in R&D and innovation will also be important for companies to stay ahead of their competitors in taking advantage of the economic upturn.

    “There is clearly more talk about innovation and the need to keep looking at the customer value proposition,” says Mr. Nibbe. “Also, with economic recovery, you've got consumers and others who are willing to try different things, different products.”

  • Americas respondents confident in US economy, but wary of cyber risk

    Among the North and South American members of CNBC's Global CFO Council, there is a strongly consistent view that the economy is recovering. Almost 90% say that the US economy is seeing modest improvement, with the remaining small minority considering it to be either stable or modestly declining.

    “There are increasing levels of optimism although the degree of confidence does vary from sector to sector,” says Mr. McGrath. “The sectors that have been very hot – technology, oil and gas, pharmaceuticals –continue to strengthen.”

    The risk of a cyber-attack on corporate infrastructure is becoming increasingly important for companies in North America. Companies are responding in a variety of ways – in North America, the most common approach is to audit or test existing technology to identify current vulnerabilities.

    Mr. McGrath explains that cyber crime is increasingly on the radar, and is becoming an important destination for investment. “In general, the amount of investment that's being devoted to tackling cyber crime is up materially,” he says. “The level of sophistication of what's happening in the cyber world is increasing which, in turn, raises awareness.”