CFOs from North America and Western Europe are more optimistic compared to the rest of the world
Fifty-seven percent of finance executives believe the global economy is improving, according to the second edition of the CFO Capital Confidence Barometer results released today by EY. Though most chief financial officers (CFOs) are optimistic, striking differences exist in regional markets. Two-thirds of CFOs from North America believe conditions are improving while fewer than half of CFOs from Latin America, Eastern Europe and Middle East/Africa see their economies growing.
Moreover, confidence in key economic indicators also varies widely by region. Sixty-six percent of CFOs from North America are confident when it comes to short-term market stability, while only 42% of CFOs from Western Europe and 40% of CFOs from Eastern Europe have that sentiment. In addition, a 21-percentage point gap exists between North American and Latin American CFOs when it comes to their optimism around credit availability.
"The results show that on a global basis, most CFOs are confident about economic conditions, but we're seeing this optimism become unstable," said Tom McGrath, the EY Americas Senior Vice Chair – Accounts. "As we scratch the surface, divergent market outlooks do exist in part due to geopolitical risks and slower growth in emerging markets."
Trends Shaping Business Strategies
The report notes several key global trends and concerns that are shaping CFOs' business and acquisition strategies. Forty-nine percent of CFOs rank the "future of work" trend as the one having the most impact on their business. CFOs are also paying close attention to digital transformation, with 40% of them citing this trend as most likely to impact their overall business strategy. Specifically, automated processes created by improved technology could be contributing to a shortage of skilled talent.
In the US, political instability, slower growth in emerging markets and Fed policy are the top three risks CFOs are most concerned with. All things considered, improving confidence in the global economy and a more positive outlook on the deal market is driving CFOs to be more optimistic about the benefits of M&A. Many CFOs are relying on deals to drive overall growth. Despite the fact that CFOs are counting on significant revenue from M&A, deal prospects have slipped from 2013.
Deal Flow
The study suggests CFOs are pursuing quality over quantity and are focused on a smaller pipeline. More than two-thirds (69%) have between one and three deals in the pipeline, and another 10% are working on four deals. This suggests that CFOs are being extremely diligent when it comes to their transactions. Emerging markets remain a priority for where CFOs are looking for opportunities. The majority of acquisition capital will be spent in these areas, rather than developed regions.
Access to Capital
A shift from cash to debt for financing deals has occurred as a result of the threat of rising interest rates and unprecedented access to credit. Nearly half (49%) of CFOs are relying on debt compared to just a year ago when 54% of CFOs were using cash to finance the majority of deals made. The increase in debt financing is likely to increase debt-to-cash ratios.
Nearly nine in 10 CFOs (87%) believe the market for credit is stable or improving, while only 13% foresee a decline. The window for refinancing debt may be closing and just 38% of CFOs plan to refinance.
Organic Growth
Fewer CFOs are focused on expanding, with just 41% expecting to grow over the next 12 months. This marks a decrease of 11 percentage points from October 2013. What's more, there are dramatic differences in growth strategies across different regions. Fifty percent of CFOs in Western Europe are focused on growth compared to just a quarter of CFOs from Latin America. More CFOs in Middle East/Africa are focused on growth than their counterparts in North America and Asia-Pacific.
"With a decline in the number of companies expecting growth, there is an opportunity for companies to differentiate themselves with a bolder growth agenda," said Jay Nibbe, EY Global Vice Chair – Accounts. "We see that R&D spending increased from 7% to 17% since last October, suggesting there is greater investment in innovation to support growth."
Rich Jeanneret, EY Americas Vice Chair – Transaction Advisory Services, EY, also said, "There is immense pressure on companies to grow, yet also focus on cost reduction. According to the Barometer, we've seen a 67% uptick in companies looking to take more risk with organic growth strategies which may translate into increased interest in inorganic growth as internal opportunities are fully exploited."
The CFO Capital Confidence Barometer is a regular survey of finance executives from large companies around the world conducted by the Economist Intelligence Unit (EIU). It measures finance executives' confidence in the economic outlook and identifies boardroom issues and practices in the way organizations manage their Capital Agendas – the EY framework for strategically managing capital.
