Confidence crisis forces business down risk-averse path

Chief financial officers in Australia are experiencing a crisis of confidence when it comes to risk appetite and plans for investment and growth, while pessimism around China is on the rise.

Deloitte surveys the Chief Financial Officers of major ASX-listed companies four times a year. The latest review at the end of 2014 found that along with China, financial market volatility, commodity prices and the ongoing federal budget impasse were all impacting business investment confidence.

"The many global and local factors fuelling that uncertainty appear to be building on each other."
Keith Skinner, Chief Operating Officer of Deloitte Australia

Broadly speaking, it found:

  • Only six per cent of CFOs surveyed were confident about the financial prospects of their company
  • Pessimism has taken hold as far as China is concerned
  • Federal Government policy uncertainty, not helped by Budget stalemates, continues to weigh heavily
  • And perhaps most worrying of all, 85 per cent of CFOs believe current levels of uncertainty will last at least another year (and for some, well beyond).

I’ve been thinking a bit more about what might be behind the China confidence blow in particular. Of course, uncertainty in the business environment is, and has been, a way of life for some time now. But the many global and local factors fuelling that uncertainty appear to be building on each other, dominating media cycles and seeping into business’ appetite to invest and take on more risk. A psychology of pessimism appear to be starting to prevail. 

China’s growth outlook is, of course, relative to what we have been used to in recent years. But our increasing reliance on China as an export market means its performance inevitably weighs on CFO confidence, certainly outweighing any improvements in the US economy.

As a result, CFO optimism (or should that be pessimism?) regarding China, slowing growth rates and its tricky economic transition, is at its lowest since the first half of 2013. And ongoing European troubles also contributed negatively, albeit to a lesser extent than China. 

I’m hopeful that both China and Europe muddle through their current challenges. And I’m even more hopeful that Australian CFOs start to see the glass as half-full rather than half-empty. 

But we’re not there yet. While risk aversion is contributing to the overall lack of confidence, continuing signs of a weaker Chinese economy, together with the Federal Government’s ongoing fiscal repair battles, appear to be impacting CFO confidence in recent quarters, and this trend has continued. 

Of course, closer to home, Canberra appears also, unfortunately, to still be a lead weight on CFO confidence. The business community had high hopes in a change of government in terms of policy certainty, stability and Budget repair. 

Now, disappointment and frustration seem to have replaced optimism as the Budget stalemate continues. In the end, the change of government in 2013 has done little in terms of reducing uncertainty, and a way out of the Budget impasse is therefore clearly important. And this was before last and this week’s leadership tensions dominated the headlines. 

Yet despite flat confidence levels, key business metrics as reported by CFOs are actually fairly stable, and even slightly positive. And while they are pursuing modest, although largely organic, growth in a challenging environment, they aren't expecting to see significant improvements for some time. 

Is risk aversion holding business back?

Nearly 75 per cent of the CFOs we surveyed felt now was not a good time to take greater risk onto their balance sheets, and over half stated their organisations were somewhat to significantly risk averse.

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Of course, risk aversion is an understandable response to the current environment, but attitudes towards taking on greater balance sheet risk had been on an upward trend until the second quarter of 2014.

They are now on the decline, and this begs a number of questions. Are we stuck, or getting stuck, in a risk-averse mindset? Are we getting in our own way and holding ourselves back? And what’s needed to cause a shift? 

Business always needs to balance growth and risk, but we do appear to be struggling to find the right balance. The big question is what will shift the needle – the dollar, improvements in China, greater certainty coming out of Canberra – or something else? 

And there are positives in the current environment, but are we in danger of erring too far on the risk side?

Keith Skinner is Chief Operating Officer of Deloitte Australia.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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