Global economic health, interest rate movements and regulation remain cause for concern
Surveyed chief financial officers recorded an eighth straight quarter of optimism regarding their organization's prospects, continuing to forecast growth in earnings, sales and hiring for the year ahead, according to Deloitte's fourth quarter (Q4) CFO Signals™ survey. However, CFOs remain cautious of external risks that are causing uncertainty for the year ahead. These include industry regulation, government policy, equity market valuations and the performance of the European and Chinese economies.
The survey, which tracks the thinking and actions of more than 100 CFOs from large North American companies, recorded an increase in CFOs expressing improved optimism. In the fourth quarter of 2014, 49 percent of CFOs expressed improving optimism, an increase from 43.7 percent last quarter and the highest level of optimism for all of 2014. Only 15.6 percent of CFOs expressed declining optimism, one of the lowest proportions in the survey's 19 quarter history. Overall, net optimism increased from +32.0 last quarter to +33.3 this quarter.
Domestically, confidence in the North American economy remained high with 63 percent of CFOs describing it as good or very good, and 63 percent believing conditions will be better a year from now. Optimism was reflected in CFOs' year-over-year expectations for key metrics. These remained strong, increasing from one year ago, though falling slightly on a quarter-on-quarter basis. Sales growth rose to 6.0* percent from 4.1* percent one year ago, though decreased from 6.8* percent last quarter. Earnings expectations also increased from 8.6* percent one year ago to 9.7* percent, though again falling from 10.9* percent on a quarterly basis.
CFOs did continue to flag some concerns, however. Worries about interest rate movements and shocks rose sharply, while concerns about tax reform continued to increase. Elements of the global economy remained a concern as well, with 73 percent describing the European economy as bad, compared to 47 percent last quarter, and just 13 percent expecting to see it improve over the next year. Views on China remained mediocre, with 34 percent believing the economy is good, and 25 percent expecting improvement in the next year.
Despite global economic concerns, only around a quarter of CFOs said the European and China situations are affecting their business planning. Industry-specific regulation (69 percent), monetary policy (55 percent), geopolitical events (49 percent) and fiscal policy (40 percent) were all flagged by CFOs as having a greater impact on business planning.
"CFOs hold a positive outlook for 2015, despite domestic and global uncertainties remaining on the horizon," said Sanford Cockrell III, national managing partner, Deloitte LLP, and leader of the Deloitte CFO Program. "Key metrics look consistently stronger and confidence in the North American economy is increasing. With stronger demand, CFOs appear to have the confidence to raise prices on products and services."
Despite positive forecasts for key performance metrics, CFOs continued a recent trend by signaling a decline in dividend growth expectations, falling from 4.1* percent to 3.0* percent this quarter. This is the third quarterly decline in a row and the lowest dividend growth expectation in two years.
However, expectations on capital spending, which fell sharply in the third quarter to 5.0* percent, rebounded to 5.5* percent. Forecasts for the U.S., where capital spending forecasts reached a survey low 3.5* percent last quarter, rose to 5.8* percent, though in Canada they declined sharply from 9.7* percent to 2.7* percent.
With company optimism increasing and sales and earnings forecasts remaining strong, 55 percent of CFOs confirmed they will raise prices this year, compared to just 18 percent who say they will be lower. While 72 percent of CFOs expect interest rates to be higher in a year, only one third say this issue is affecting their pricing. Likewise, only 27 percent confirmed that energy prices are affecting their pricing.
"As North American economies have picked up over the past several quarters, many CFOs' worries about price-based competition and irrational competitor behavior have subsided," noted Greg Dickinson, director, Deloitte LLP, who leads the North American CFO Signals survey. "Pricing strength seems to be a good indication of companies' growing confidence."
Additional findings from the Deloitte Q4 CFO Signals survey include:
Energy sector sees fall in key metrics: CFOs in the energy and resources sector recorded sharp falls in year-over-year earnings and sales expectations. Earnings forecasts fell to 3.4* percent from 10.3* percent last quarter and sales forecasts to 4.0* percent from 7.3* percent. Over 20 percent of CFOs in the sector expressed declining optimism, primarily due to external factors. This was an increase from 0 percent who expressed declining optimism in the second and third quarters of 2014.
CFOs utilizing more aggressive tactics on retirement risk: The attractiveness of eliminating or greatly reducing retirement risks has led to accelerated use of tactics to achieve this. Nearly half of CFOs (45 percent) with pension plans have utilized comparatively aggressive tactics like offering lump-sum payouts. One quarter (25 percent) of CFOs have used voluntary lump-sum pay-outs for retirees and 42 percent for terminated employees.
CFOs focusing on three core actions to address uncertainty: CFOs confirmed they have pursued a range of actions to help their organizations manage uncertainty. The most common included ensuring business performance by establishing new cost efficiencies, financial plans and analytical approaches; managing operating risk through risk management strategies and systems; and managing balance sheet risk by strengthening balance sheets, ensuring liquidity and managing interest rate and foreign exchange exposure.
