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CFOs dim their economic outlook for North America, Europe, China

CFO sentiment toward current economic conditions in North America, Europe, China and South America fell at the end of 2023. This is according to the Deloitte CFO Signals report for Q4 2023. In contrast, CFOs upped their views toward current economic conditions in Asia, excluding China, with 28% of CFOs considering current conditions as good, an increase from 24% in 3Q23.

Slightly under half (47%) of CFOs rated the current economy In North America as good or very good, a notable decrease from 57% in 3Q23. Just 9% of CFOs noted current economic conditions in Europe as good or very good, a dip from 11% in Q3 2023. Meanwhile, 3% of respondents signalled China's current economy as good or very good, down from 8% in the prior quarter's survey. Finally, 8% of CFOs considered South America's current economy good or very good, down slightly from 9% in 3Q23.  

A similar downward trend can be seen in CFOs' outlook for regional economies 12 months out. For example, 37% of CFOs said they expect economic conditions in North America to improve, a drop from 46% in the previous quarter. Only 16% of CFOs expect conditions in Europe's economy to improve in a year, down from 29% in 3Q23. Just 12% of surveyed CFOs anticipate better economic conditions in China in a year, down from 20% the previous quarter. CFOs’ 12-month outlook for other economies in Asia excluding China dipped slightly, with 26% anticipating better conditions vs. 27% in the previous quarter.

There were some signs of optimism for South America's economy, with 18% of CFOs expecting conditions to improve in the year ahead, up from 9% in 3Q23.

Own-company optimism and risk

The percentage of CFOs expressing optimism for their companies' financial prospects decreased to 38% from 41% in the prior quarter, while those expressing pessimism rose to 27% from 19% in 3Q23. As a result, CFOs’ net optimism fell to +11 from +22. 

In line with this fall in optimism, the proportion of CFOs who believe now is a good time to take greater risks (38%) was outweighed by those who say now is not a good time to do so (62%). The gap may be influenced by what CFOs see as the top three constraints on their companies' ability to achieve their financial performance goals in the next 12 months: inflation/interest rates/liquidity impact, macroeconomics, and geopolitics.

Key operating metrics

In Q4 2023, CFOs lowered their year-over-year growth expectations from 3Q23 levels across five of six operating metrics tracked by CFO Signals. Growth expectations for revenue dropped to 5.1% from 5.5%, while expectations for growth in earnings decreased to 6.8% from 8.3%. 

CFOs’ expectations for growth in dividends dipped to 2.6% from 2.8%, and their growth expectations for capital investment fell to 6% from 6.3%. CFOs’ expectations for growth in domestic hiring fell to 1.6% from 1.8%; in contrast, they raised their expectations for domestic wages and salaries to 3.8% from 3.6%.

Expectations for 2024

Concerning company strategy, more than three-quarters (76%) of CFOs expect digital transformation and technologies to play a more significant role in 2024. In fact, 80% of CFOs expect their organisations to embed more automation/digital technologies into their operations in the coming year.

Nearly half (48%) plan to increase their focus on new markets inside North America versus the 30% who indicated their focus will be on new markets outside the region. Slightly more than one-quarter (26%) of CFOs say inflation will affect costs to the same degree in 2024 as in 2023, and half of CFOs expect their companies to raise prices for a substantial portion of their products/services to offset it.

Regarding capital, 67% of surveyed CFOs indicate they will allocate or reallocate capital to new business investments. This is particularly interesting, considering 62% of CFOs believe now is not a good time to take on greater risks.

More than three-quarters (76%) of surveyed CFOs expect cybersecurity to be a top priority for the audit committee over the next 12 months, beyond financial reporting and internal controls, and indicate enterprise risk management (43%) and finance and internal audit (40%) as the next top priorities for the audit committee in 2024. 

As many return to work after the holidays, the question of where that work will take place as the year unfolds arises. Around two-thirds (65%) of surveyed CFOs expect their companies to offer a hybrid work arrangement in 2024. For some, that could be a silver lining or a looming cloud, depending on where an organisation and their talent stand on the topic.

2024 M&A strategy

Of the surveyed CFOs planning to pursue M&A and joint venture opportunities (JV), 57% say increasing competitive positioning and/or capturing sector and market leadership best describe their companies' top M&A strategy. Strengthening a core business or raising capital follows, cited by 34% of CFOs.

Slightly more than one-third (34%) of CFOs expect their companies to increase the average number of deals they close over the next 12 months, while just 13% expect a decline over the same period. Almost half (46%) do not expect any change, with 7% indicating they don't know/are not sure. 

Looking further out, more than half (51%) of surveyed CFOs project M&A to account for 1% to 10% of their companies' growth in the next three years, and 19% of CFOs expect between 11% and 50% of their companies' growth to derive from M&A in that period.

Almost half (49%) of surveyed CFOs indicate they will likely use all cash to finance their deals in the next year, while 30% expect to use alternate structures, such as JVs and strategic partnerships.

Nearly three-quarters (71%) of surveyed CFOs say that the valuation of assets/widening bid-ask spreads is among their companies' top three challenges to M&A or deal success. Integration/divestiture (36%) and the status of debt markets (30%) round out the top three most often cited responses.

Assessment of capital markets

Over one-third of surveyed CFOs (35%) consider US equities overvalued this quarter, a substantial decrease from 56% in 3Q23. Nearly one-quarter (23%) of respondents regard US equities as undervalued, a notable increase from last quarter's 9%.

CFOs’ enthusiasm for debt and equity financing dropped again this quarter, likely due to the continued impact of high interest rates. Just one in ten (10%) of CFOs found debt financing attractive, down from the previous two quarters' 16%, while 19% considered equity financing attractive, a decrease from last quarter's 29%.

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