Australian CFOs report decreased market optimism

Australia’s chief financial officers have become less optimistic about the Australian economy in the past year, citing concerns about global and local economic conditions, including the rising trade tensions between the US and China.

Deloitte’s biannual mid-2019CFO Sentiment survey asked about 80 chief financial officers to offer their thoughts on the market.

The report found net optimism about the economy decreased from 73 per cent 12 months ago to 60 per cent, and net pessimism grew from 8 per cent at the end of 2018 to 22 per cent.

Deloitte CFO program leader Steve Gustafson said chief financial officers were still more optimistic than not and sentiment remained in positive territory, but it had fallen in the past two surveys.

“What had been a glass half full on outlook and risk appetite, had become more of a glass-half empty, and this new survey, undertaken in June and July, suggests the glass has emptied a little more,” he said.

“To an extent, competing forces are at play.

“Economic conditions, both at home and abroad, are the key contributors to waning optimism, and China is the biggest source of global concern.

“But the stimulus provided by the recent rates cuts is seen as a major positive, and our survey ran prior to the legislating of the government’s income tax cut package.”

Mr Gustafson said fears had risen about the possibility of global growth stagnating for an extended period of time and China was still the biggest concern by far.

Nearly half of respondents (44 per cent) reported rising trade tensions between the US and China had negatively affected their business, and 68 per cent expect negative impacts in the next one to four years.

“Net optimism on this front has turned into net pessimism, as more chief financial officers believe the possibility of a China hard landing scenario is worth preparing for,” Mr Gustafson said.

At home, he said, domestic financial conditions were creating favourable operating conditions for many businesses including low interest rates, a fairly steady dollar and some high commodity prices.

Of the chief financial officers surveyed, 71 per cent said the Reserve Bank of Australia’s recent interest rate cuts boosted their optimism.

However, Mr Gustafson said there was still significant concern about Australia’s overall economic performance.

“Net pessimism about the Australian economy has grown almost three-fold since the end of 2018, and chief financial officers are almost as concerned about our economy as they are about China’s,” he said.

“On the upside, one area where CFOs are happy is the RBA’s recent interest rate cuts and their impact on the broader economy, and just over 75 per cent are expecting to see at least some stimulatory impact.

“The combination of interest rate cuts and rising uncertainty has also made external sources of funding far more attractive than spending profits.

“Over the last six months, the net attractiveness to chief financial officers of bank borrowing, corporate debt and equity issuance has risen, while that of internal funding has declined.”

According to the report, nearly a third of chief financial officers expected to see an increase in their business’ mergers and acquisitions activity over the next 12 months, mainly to expand or diversify products and services to rapidly shifting consumer demands.

“Chief financial officers said their businesses were increasingly eager to please a diverse range of customers, and this came with the added benefit of reducing risk across market segments,” Mr Gustafson said.

“Overall, it seems most are using mergers and acquisitions to improve outputs and the number of people those outputs are reaching. And while it’s still a focus for some, fewer chief financial officers are using M&A to improve key inputs such as technology, talent and supply chains.

“Mergers and acquisitions also isn’t just about expansion; almost a quarter of chief financial officers expecting their company to divest a business in the next 12 months, with key motivations either portfolio reshaping removing non-core components.”

When asked about interest rates over the next 12 months, chief financial officers said they expected interest rates to fall or stay the same.

“This is a 180 degree reversal from this time last year, when no chief financial officers believed interest rates would decline over the next year,” Mr Gustafson said.