CFO Sentiment: Confidence bounces back

Australian CFO optimisim has bounced back from a severe COVID-induced shock, with the strength of the country’s economic recovery supporting a return to more positive sentiment after the confronting year that was 2020.

More than 70% of CFOs are feeling optimistic or highly optimistic about the financial prospects of their companies, and more than half are even willing to take more risk onto their balance sheets. But they also appreciate that challenges remain, particularly for some sectors, as COVID restrictions such as border closures impact some more than others.

According to the latest edition of Deloitte’s biannual CFO Sentiment survey, and covering the second half of 2020:

  • 62% of CFOS are feeling optimistic about the financial prospects of their company, and a further 13% are highly optimistic
  • Net optimism compared to six months ago has increased significantly – to positive 62% from negative 30% – the biggest bounce in the survey’s history
  • Net uncertainty about economic conditions was 87%, only slightly lower than the record 92% from mid-2020
  • 54% think Australian businesses are optimally geared, while 27% think they are under-geared
  • 65% see environmental, social and corporate governance (ESG) including climate change considerations as important when it comes to most parts of their business, and 49% see value creation potential in the longer term
  • 71% expect their M&A activity to increase over the next 12 months, with a focus on acquisitions
  • Flexible working (62%) and digital opportunities (55%) are top business recovery priorities for 2021.

Deloitte partner, and CFO Program leader, Stephen Gustafson, said: “It goes without saying that the year 2020 was a rollercoaster for Australia’s economy, for business, and for our communities, and for each and every one of us.

“When we surveyed Australian CFOs in early 2020, and before the reality of a global pandemic had hit at all, there was evidence of a positive turning point for business sentiment. When we went back to them in mid-2020 things had, not surprisingly, changed significantly. The COVID-induced global economic downturn, and Australia’s first recession in nearly 30 years, struck the country, and CFO optimism, hard.

“They were under no illusions that there would be major challenges to confront, but also that those challenges would present opportunities for those who had built true resilience and agility into their businesses.

“But 2021 points to a marked shift in Australia’s economic performance and a fairly remarkable V-shaped recovery. With nine out of ten jobs lost through the pandemic already returned, and consumer confidence at a decade-long high, it’s perhaps no real surprise that Australian CFOs have their mojo back.

“That doesn’t mean the pandemic no longer poses risks to the economic outlook, and it’s not a one-size-fits-all recovery – tourism and accommodation and international education, for example, remain severely impacted by border closures. But Australia is one of only a handful of nations that can lay claim to entering 2021 well-placed, and positive CFO sentiment is significantly up on the back of this.”

The confidence and uncertainty conundrum

“This bounce back in confidence still needs to be seen in the context of extremely high levels of uncertainty, and the risks that go with that, playing on many CFOs’ minds,” Gustafson said.

“Fortunately, and this has a been an emerging trend identified by the survey more recently, it appears CFOs are continuing to adapt to high levels of uncertainty as a ‘new normal’ they have to factor into business strategy and operations.

“So, in spite of uncertainty, confidence has not been held back, and record low borrowing costs, combined with strong economic momentum, can be seen as a recipe for an increased appetite for taking on balance sheet risk, and pursuing opportunity and growth.”

Climate considerations

Gustafson said the survey revealed that environmental, social and corporate governance (ESG) including climate change are increasingly important considerations for CFOs and their businesses.

“In a recent Deloitte Access Economics report – A new choice: Australia’s climate for growth – if climate change goes unchecked, then Australia’s economy will be 6% smaller and have 880,000 fewer jobs by 2070. But there’s a $680 billion dividend, and 250,000 more jobs if we do rise to this challenge.

“Australian business are increasingly focused on environmental impact and opportunity – by desire as well as necessity, and according to our CFO survey respondents, more than 75% factor ESG including climate change impacts into their planning and decision making.

“While a focus on nearer term business issues and demands is the largest barrier to fully integrating ESG including climate action into core planning and operations, CFOs also recognise these issues could be much greater sources of both risk and value in the longer term when it comes to achieving strategic business objectives and capital allocation.”

Flexible working, digital opportunities top priorities

“Surely one of the most visible impacts COVID has had on Australian businesses big and small has been the increased need for flexible working arrangements,” Gustafson said.

“As CFOs look to 2021 as a year of recovery, incorporating ongoing employee demand for flexibility around work location and hours is the most common opportunity identified to support their recovery.

“When COVID-19 first hit, physical attendance at workplaces obviously dropped sharply, but even at its best, as restrictions have eased, it still remains about 20% lower than pre-pandemic. This suggests there will continue to be ongoing demand for flexible working arrangements for some time yet, both because COVID has not yet gone away, and to accommodate shifting worker preferences. Accordingly, many CFOs are prioritising this.

“Technology, including AI, and digital transformation are also high on the agenda, as CFOs look to refresh parts of their business strategy. This has likely been driven, at least in part, by the prioritisation of flexible working arrangements, with better technology making different ways of working more efficient and viable.”

And looking ahead…

“Just as it has been in recent surveys, navigating uncertainty in the pursuit of opportunities and growth will be a key focus for CFOs – in 2021 and beyond,” Gustafson said.

“In accordance with Reserve Bank guidance that the cash rate will likely stay at its record low level for at least another three years, most are expecting interest rates to remain that way 12 months from now, and this will drive the renewed impetus to invest and seek pursue acquisitions.

“That said, just over 10% of CFOs also still think it is possible that interest rates could be higher than their current level a year from now, a possibility given the RBA will be watching closely for signs of inflation and/or distortions in asset markets.

“As one of the factors shown to have a positive impact on optimism for many CFOs, interest rates remaining low should certainly help support continued confidence growth in Australian business activity more generally.”

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