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The Actuary The magazine of the Institute & Faculty of Actuaries

Business optimism at 18-month high but risk appetite remains muted

Optimism among chief financial officers (CFOs) at the UK’s largest businesses is at the highest level it has been in 18 months according to the professional services company Deloitte.

Optimism giving 'confidence heading into 2017' ©Shutterstock
Optimism giving 'confidence heading into 2017' ©Shutterstock

Their latest CFO Survey shows that 27% of CFOs are optimistic about the prospects for their companies, up from 16% in the previous quarter and the 3% seen immediately after the EU referendum.

It was found that 22% are less positive about the future than they were three months ago, making the final quarter of 2016 the first where a net balance of CFOs are more optimistic than not since quarter two of 2015.

Deloitte chief economist, Ian Stewart, said: “Buoyed by a backdrop of continued UK growth, CFOs have become markedly more positive on the outlook for their businesses and enter 2017 in better spirits than at any time in the last 18 months.

“However, rising optimism does not represent a return to business as usual. Uncertainty in the external environment continues to keep a lid on corporate expansion.”

Source: Deloitte
Source: Deloitte

Despite more optimism, levels of risk appetite are below average, with 80% of CFOs saying that now is not a good time to take risks, although this is down on 92% who felt that way just after June 23.

Many CFOs appear to be focused on defensive balance sheet measures, with 45% saying cost reduction is a strong priority for 2017 and 41% planning to increase cash flow.

“Risk appetite remains depressed and is well below average levels and corporates remain on a defensive footing, with cost reduction and building up cash as their top priorities,” Stewart added.

The latest survey involved questioning 119 CFOs of FTSE 350 and other large private companies, with the combined market capitalisation of the 81 listed companies who participated being £396.3bn.

The effects of Brexit remains the top concern for CFOs, on average ranking it at 62 on a scale of 0-100, up from 57 in the previous quarter.

The next biggest concern is weak demand, ranked at 55 out of 100 on average, followed by tightening monetary conditions in the UK and US, and weakness in the Euro area, ranked at 53 and 52 respectively.

Overall, 66% of CFOs believe that the long-term business environment will be worse when the UK leaves the EU, while 14% believe the business environment will be better after Brexit.

Deloitte chief executive, David Sproul, said: “2016 has been a tumultuous year but the optimism seen in this survey does give us some confidence heading into 2017.

“Uncertainty is the new normal in business life but the challenge for corporates is to gauge and mitigate external risks, while staying open to opportunities."