Global economic woes hit CFOs hard
What keeps CFOs and bankers up at night? We'd probably rather not know, but what they should be concerned about is the global economy, at least according to two surveys by Deloitte and EY.
Economic and equity market volatility since the beginning of 2016 are behind falling optimism among North American CFOs, as are geopolitical risks, slow economic growth and a possible global over-reliance on the US economy. This gloom is reflected in the European banking market as risk, regulation and cost cutting take their toll on the outlook for banks. There are some signs of optimism for UK debt and equity market issuance but that is overshadowed by the spectre of Brexit and the threat that poses to London's derivatives and repo trading markets.
Deloitte's North American CFO Signals survey for Q1 2016 indicates growing unease among financial executives with regards to the state of the global economy.
Although one-third of CFOs in North America said they were optimistic (similar to last quarter), about 31 per cent say they feel “declining optimism”, which is the highest level since the end of 2012. Economic and equity market volatility at the beginning of 2016, and the effect that will have on liquidity and on consumer spending, were cited as reasons for falling optimism.
Overall, expectations for revenue growth were lower than in 2015, as were expectations for earnings growth, capital spending and domestic hiring.
CFOs eye geopolitical risks
In the survey, CFOs also voiced their concerns about geopolitical risks, slowing growth in developed and developing economies and a possible global over-reliance on the US economy.
Fewer CFOs now describe North American conditions as good (41 per cent in Q1 2016, compared to 55 per cent last quarter) and fewer expect better conditions a year from now (36 per cent compared to 47 per cent last quarter). There were similar reduced levels of optimism for China's economy and its prospects for improvement, although there was a small rise in the percentage of CFOs who expect to see improvement in the European economy in the coming year.
Pessimism reflected in Europe
Gloom among North American CFOs is very much reflected in the European banking community. A survey by EY shows a decline in market confidence among European banks with overall optimism at its lowest level since 2012. Fewer banking executives expect performance in their industry to improve in the next 12 months (52 per cent compared to 56 per cent in 2015). Risk, regulation and cost cutting were three factors that dominated the banking agenda in the UK and in Europe as a whole.
Reasons to be cheerful
However, the EY survey also found some reasons for optimism:
- 83 per cent of UK bankers anticipate growth in debt and equity market issuance in 2016;
- increased capital markets activity in the UK is also expected; and
- bankers in Europe consider that lending policies to the majority of sectors will become less restrictive over the course of 2016.
Rocky road to Brexit
Despite the positive outlook for Britain's debt and equity markets, the UK financial services industry is facing some tough potential challenges. The spectre of Brexit continues to cause uncertainty. Not only is sterling continuing its decline against the euro since the start of 2016, but the future of London's financial trading centre also hangs in the balance.
The euro derivatives market and the repo market in London is worth €2 trillion and there is a possibility, according to European Central Bank (ECB) officials, that the ECB would push for this market to move to Frankfurt and Paris, should the UK vote to leave the EU in the referendum on 23 June.
Christian Noyer, a former ECB vice president and Bank of France governor, said: “If Britain left the EU, the euro area authorities could no longer tolerate such a high proportion of financial activities involving their currency taking place abroad.”
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