Risk & Economy » Amid Brexit and trade wars, CFOs play defense

Amid Brexit and trade wars, CFOs play defense

CFOs in the UK and US have grown more risk-averse, and will be focusing on defensive strategies, according to a recent Deloitte Survey. Sandy Cockrell lll of Deloitte Touche Tohmatsu Limited and Richard Muschamp of Deloitte North West Europe draw further upon the results

Faced with resurgent uncertainty over Brexit in the UK and rising concerns about an international trade war broadly, many CFOs in the UK have grown more risk-averse, and are placing greater emphasis on defensive strategies.

CFO surveys conducted by Deloitte member firms in a number of geographies in Europe also find varying levels of uncertainty among Europe’s CFOs, with a widening gap between the perceptions of CFOs in countries inside and outside the euro area, according to Deloitte’s European Spring 2018 CFO survey. Generally, CFOs inside the euro area (those countries that use the euro currency) perceive a lower degree of uncertainty over the last six to eight months compared to perceptions of rising uncertainty among CFOs outside the euro area, including the UK.

For example, results from the survey for Q2 2018 paint a picture of dimming CFO optimism, falling expectations for company performance, and heightened risk aversion. The survey found that UK corporates are now placing as much emphasis on running defensive balance sheet strategies as they did at the height of the euro crisis in 2012 and immediately after the EU referendum. Increasing cash flow is UK CFOs’ top priority with cost reduction in second place, followed by reducing leverage. The survey results also indicated that wage pressures are building in response to rising recruitment difficulties and skills shortages.

Meanwhile, business sentiment continues to be buffeted by the news on Brexit, leaving the UK corporate sector at the mid-year point defensive and watchful. How that changes over the rest of 2018 will be heavily dependent on the unfolding negotiations between the UK and the EU in the next six months.

Source: Deloitte UK CFO Survey, Q2 2018

Drawing further upon the Deloitte UK Q2 2018 survey’s findings, three major issues appear to be top of mind as CFOs plan and set strategies for the next 12 months, and beyond.

1. Brexit’s impact on business sentiment, spending, and hiring

With recent developments creating new uncertainties for the outcome of Brexit negotiations, CFOs have once again named Brexit as their top risk, and three-quarters of CFOs now expect that Brexit will lead to a deterioration in the long-term business environment, the highest proportion since this question was first posed in the immediate aftermath of the referendum in late June 2016.

As a result, UK CFOs, based on the report’s findings, expect to reduce their own spending: 40% of surveyed finance chiefs intend to scale back their hiring plans (from 30% in Q1 2018), and one-third of surveyed CFOs plan to reduce capital expenditure over the next three years, up from 25% in Q1 2018.

Source: Deloitte UK CFO Survey, Q2 2018

Source: Deloitte UK CFO Survey, Q2 2018

2. Rising concerns on international matters

Many CFOs in Europe have also become considerably more concerned about the risks to their business posed by the prospect of greater protectionism in the US leading to trade wars. Those findings mirror results from Deloitte’s Q2 2018 CFO Signals™ survey of CFOs from large North American companies. CFOs there continue to express concerns about the future — especially around trade policy and geopolitics. Moreover, North American CFOs’ perceptions of Europe’s current state and trajectory receded in Q2 after hitting survey highs over the prior two quarters. 47% of CFOs in the survey indicated that current conditions in Europe are good, and 36% expect better conditions in a year — both metrics are down from 55% and 51%, respectively, compared to the previous quarter.

Among UK CFOs, the prospect of further rate rises and tightening monetary conditions in the UK and US remained the third-greatest risk (behind Brexit and weak domestic demand). Concerns over the impact of tightening monetary policy in the US and Europe were recently echoed by four Deloitte global economists, who named it as a chief factor contributing to the significant chance of a global downturn by the end of 2020.

3. Increasing skills shortages and pressure on wages

With unemployment at a 43-year low, and inflows to the UK labour force from overseas slowing, skills shortages are building up in the UK. 44% of UK CFOs surveyed reported that their businesses have experienced a rise in recruitment difficulties or skills shortages over the last three months, a significant jump from 31% in the first quarter of 2018. A sustained rise in wages would clearly add to the challenges facing corporates as they seek to rein in costs.

The skills shortage appears especially urgent for companies’ digital transformation efforts. A recent Deloitte survey of UK digital leaders found that only 16% believe their talent pool has enough knowledge and expertise to deliver their digital strategy, while over three-quarters are experiencing challenges in recruiting employees with the relevant digital skills.

How CFOs can respond

How and whether CFOs’ defensive and watchful stance changes over the rest of 2018, will be heavily dependent on the unfolding negotiations between the UK and the EU in the next six months. However, it is important to note that even as CFOs emphasise cost-cutting, increasing cash flow, and other defensive balance sheet moves, offensive strategies could be helpful in navigating through the uncertainty.

For example, by using scenario planning along with finance’s analytic and forecasting capabilities, CFOs can identify and understand how to mitigate economic and other external risks. CFOs should consider asking what could happen to the business’s capital allocation plan — and the strategies and investments the plan is designed to fund — if the credit markets should slump and a large bond issuance has to be postponed. When it comes to addressing Brexit uncertainty, scenario planning can help CFOs understand what it would mean for their operations, businesses, systems, and regulatory compliance to conduct trade with the EU outside the single market, under World Trade Organization rules.

As the war for talent heats up, especially for those with digital skills, CFOs should consider looking to re-tool talent recruiting and development strategies, both for the finance function and across the enterprise. Think in terms of building a brand with employees that positions the organization as an attractive career destination. Consider rotational programs, special assignments, and other ways to offer staff opportunities to build their skills and advance their careers.

Introducing new products or services or expanding into new markets is another strategy that CFOs should consider keeping in mind. In the survey, the expansionist strategy was the third-highest business priority and highlights that CFOs understand when a strategic opportunity outweighs the risk, and that they are willing to consider investments in order to benefit growth, even under challenging business conditions.

By continuing to address long-term competitive issues, such as digital transformation and winning the war for talent, CFOs can position their companies to emerge stronger when business conditions dictate shifting back to offense.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.


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