CFO perceptions of external financial and economic uncertainty have seen the sharpest rise in five years, said Deloitte.
It explained that moves in financial markets and risk appetite among CFOs are closely correlated: Both react to similar factors and financial markets directly influence corporates, for instance through the availability and pricing of capital. Equities sold off in the third quarter, with emerging markets seeing the largest outflow of capital since the financial crisis. With UK equities down 18 per cent in the last three months there has been a parallel loss of risk appetite among UK firms.
Furthermore, the third quarter saw a rise in investor risk aversion as they moved away from riskier assets and into safer government bonds. This has also fed through to a fall in risk appetite among CFOs.
The proportion of CFOs who think now is a good time to take risk has dropped to 46 per cent, down from 59 per cent in the second quarter and 72 per cent in 2014.
An uptick in risk aversion is feeding into a more defensive stance on the part of major corporates, with a greater focus on cost reduction and rather less on investment. Levels of optimism among CFOs have also decreased with 29 per cent now less upbeat about their company’s financial prospects than they were three months ago.
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CFOs see the prospect of tighter monetary policy in the UK and the US as the greatest risk facing their businesses.
The slowdown in emerging markets now ranks joint second, together with concerns about euro area growth, on CFOs list of worries. Against a backdrop of falling business confidence, the recent moves by the Bank of England and the US Federal Reserve to signal that interest rates are likely to stay lower for longer look well judged.
CFOs may rate uncertainty and emerging market weakness as constraints on investment, but they see the state of the UK economy as being a significant support for investment.
“The UKs recovery from the recession has been punctuated by a series of external shocks, of which weakness in emerging markets is the latest,” Deloitte said. “A strong pound and weaker demand in emerging markets dim prospects of an export-led recovery ? and put greater weight on domestic demand to drive UK growth.