CFOs are still positive about 2016 but their confidence is trending down

Deloitte CFO Survey

Despite the oil downturn, trouble in China, and a strengthening US dollar that has hurt US retail numbers and manufacturers, Chief Financial Officers in the United States are still touting a relatively positive attitude for 2016.

“Overall, there seems to be a belief among many that North America (and the US in particular) can continue to shoulder the burden of economic growth again in 2016—despite interest rate increases and a US presidential election that appears already on many of their minds,” Deloitte writes in its CFO Signals: 2015 Q4 survey.

Each quarter, CFO Signals tracks the thinking and actions of CFOs representing many of North America’s largest and most influential companies.

One hundred twelve CFOs responded during the two-week period ending November 20. Just over two-third (76%) of respondents are from public companies, and 82% are from companies with more than $1 billion in annual revenue.

Here are the top questions answered by CFOs that shed some light on North American business sentiment.

How do you regard the current and future status of the North American, Chinese, and European economies?

North American Sentiment: More than half (55%) of CFOs describe North American conditions as good compared to 59% last quarter. Almost half (47%) expect better conditions in a year, down significantly from 55% last quarter.

China Sentiment: A growing number (14%) of North American CFO’s thought China’s economy was in good shape, a steep 10% improvement over Q3 2015.  While 16% expect improvement (up from 10%).

European Sentiment: Eight percent describe Europe as good (up from 5%), but only 15% see it improving in a year (down from 30%).

Here’s a chart from Deloitte that shows economic sentiment shifts by region since Q1 2014. 

Deloitte

What is your perception of the capital markets?

More than half (56%) of CFOs say US markets are overvalued (down from 60% last quarter). While 80% still believe that debt is currently an attractive financing option, and 26% of public company CFOs view equity financing favorably (down from 36% last quarter).

The survey shows that CFOs have continued to believe markets are overvalued at a higher rate than any undervaluation that has occurred since Q4 2014.

CFO Deloitte Survey

What is your company’s business focus for the next year?

North American markets are still the overwhelming focus for business leads. CFOs are focused on current offerings and organic growth.

Business - Deloitte Value

Business - Deloitte

Inorganic Growth

Compared to the past 12 months, how do you expect your key operating metrics to change over the next 12 months?

Revenue growth expectations rose from 4.4% to 5.9%, well above their second quarter lows and about even with a year ago.

Earnings growth expectations rebounded from last quarter’s survey-low 6.5% to 8.3%—back near the two-year average.

Capital spending expectations rebounded from last quarter’s 4.3% to 4.9%*. Domestic hiring growth expectations are again sluggish, falling slightly to 1.2% from last quarter’s 1.4%.

Compared to three months ago, how do you feel now about the financial prospects for your company?

CFOs reported 11 quarters of positive sentiment and Q4 remained with net optimism above a 10.0 score at +10.7. Sentiment was down from + 14.2 last quarter and a three-year low.

Just over one-third (34%) of CFOs express rising optimism, also a three-year low. The proportion expressing declining optimism rose from 19% to 23%.

As this Deloitte chart shows, there has been a growing number of CFOs who have become less optimistic since Q4 2014. With markets possibly settling into a correction in 2016, the “more optimistic” group actually experienced a very slight jump in support.

Deloitte CFO Survey Q4 2015

Overall, what external and internal risks worry you the most?

Slow global growth and geopolitical instability are still among the top concerns of CFOs.

Many CFOs worry about a US pullback caused by rising concerns about labor costs, declining domestic manufacturing, and the world’s reliance on the US economy.

Commodity prices and regulation were major concerns for CFOs in some industries.

Talent retention is also a major concern, as is the 2016 US presidential elections.

This chart shows non-industry specific up and downturns in risk over the last quarter.

Deloitte CFO Survey - 2016

There’s some good news for anyone who thinks China’s economy is going to drag the US down into another recession. Only 27% of CFOs said they believe he North American economy is dependent on a stronger China.

One-fourth (25%) of CFOs also say they expect to see faster growth in 2016, while an equal number expect slower growth.

Despite some positive signs, 30% of CFOs expect the economy to grow at or below 2% through 2017, and the same proportion disagrees.

Perhaps the biggest concern of the year are the 2016 presidential elections. Forty-five percent of CFOs (49% of US CFOs) say the election outcome will substantially impact future performance, and less than 30% say it will not.

In the retail/wholesale, financial services, and services spaces, twice as many CFOs believe the election outcome will impact performance as believe it will not.