A Split Decision on Cash

The Duke/CFO Magazine Global Business Outlook Survey shows finance chiefs in some regions deciding that they can afford to invest again in growth.
David W. OwensJuly 18, 2014

The Duke University/CFO Magazine Global Business Outlook survey for the second quarter of 2014 reveals a global business environment still in a state of transition. Economic optimism remains strong among many companies in the United States and Asia, but certainly not all. Executives in Europe still appear uncertain about their prospects, while the outlook in Latin America continues to trend downward.

We collected responses from 405 CFOs and other executives at U.S. companies of all sizes, and from 438 executives from countries in Europe, Asia, Latin America and Africa. Across geographies, for some companies an increasing confidence in improved economic conditions is starting to translate into movement in their cash reserves. Companies will typically accumulate cash when they feel they have to, and spend it when they are feeling more confident. In the middle of changing times, however, it may be difficult to discern exactly when that turning point is reached.

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U.S. firms, for example, are evenly split on whether they will begin to deploy cash reserves this year or continue to hold their cash tightly. A little less than 40% of U.S. respondents take each position, with the remainder still unsure which way they will go. European firms show a similar equanimity, splitting almost precisely into thirds between spending accumulated cash, retaining it, and still deciding what they will do.

On the plus side, the U.S. companies that expect to start spending down their reserves are primarily looking to invest in their own growth. By far, the most common use of cash will be for capital spending and investment (63%). Acquisitions are a distant second, garnering 29% of respondents, and paying down debt is third, at 26%. This trend holds true in other regions, as well. If companies are going to dip into their cash reserves, they are most likely to be redeploying the cash into capital spending and investment.

Beyond that, Asian firms are more likely than either their U.S. or European peers to use cash for hiring and marketing, fueling their more aggressive growth. In fact, the most ambitious spenders are in Asia; executives there are more than twice as likely to say that they plan to spend some of their accumulated cash than that they will hang on to it.

Oddly enough, in the troubled region of Latin America, spenders also outnumber savers by about two to one. Slightly more than half of the executives (53%) say they will start using their cash reserves, and half of these companies intend to direct the cash toward capital spending and investment, as in other regions.

However, the other uses to which Latin American companies expect to put their cash holdings reveal some stark differences from other regions. Latin American companies are more likely than firms from any other region — even the Europeans — to be paying down debt and covering operating losses, for example, and virtually none of the Latin American respondents expects to be able to boost hiring.

Every region has its share of reluctant spenders, of course, but for different reasons. In the United States and Asia, where the economic outlook is more positive, executives are more likely to say that they won’t need to use cash to fund their businesses. Responses from Europe and Latin America, on the other hand, reflect the uncertainty dogging those regions. There, companies holding on to their cash are most likely to be doing so either to retain it as a buffer against uncertainty or because they simply don’t have excess cash to spend.

14Jul_Outlook_p41aConfidence Builds
While U.S. CFOs are split over their intentions to tap into cash reserves, their overall optimism about the U.S. economy continues to build slowly but steadily. The Global Business Outlook survey asks finance executives to use a scale from 0 to 100 to rate the prospects for their local economies and for their own companies over the next 12 months. In the second-quarter survey for 2014, the U.S. economic optimism rating rose to 61.1 out of 100, hitting a level rarely seen since 2007. The confidence of U.S. finance executives in their own companies has also bounced back, coming in at 67.1 following last quarter’s dip to 64.

This level of optimism on the part of U.S. CFOs appears to be bucking the trend seen elsewhere. In every other region, executives’ optimism about their own companies is falling from the previous quarter. The decline is moderate in Japan, but steeper in the emerging economies in Asia. In both cases, however, optimism about their respective economies — as opposed to their companies — has actually improved since last quarter.

Meanwhile, in Europe it appears that a divide is opening up between the optimists and the pessimists. Average (mean) ratings both for the economy (53.5) and for companies (58.6) retreated from the levels we saw at the year’s outset. At the same time, the median score for economic outlook remained unchanged since last quarter, hovering at 60, and more than half of the Europeans (53%) said they felt more optimistic about their respective countries’ economies.

It seems likely that some European companies, battered by recession and austerity programs, are having deeper doubts about their ability to cope. The most pessimism is found in the banking/financial services and mining/construction sectors, dragging down the average score for economic optimism. Other companies feel better prepared to regroup and take what advantage they can from weakly improving economies —especially in the retail industry, hinting at hopes for a renewal of consumer demand.

14Jul_Outlook_p41bSigns of hope are even harder to discern in Latin America. One year ago, Latin American CFOs were the most optimistic in the world. In a dramatic turnaround, the Latin American optimism index has fallen to 52.5 out of 100.

Overall, a little more than half of the executives from this region say they are less optimistic about their countries’ economies this quarter than last. The outlook is particularly gloomy in Brazil, where more than 90% of the respondents are worried about the effects of government policies and economic uncertainty on their companies. Nearly all of the executives from Brazil (94%) say that inflation remains a concern, and 85% expect labor unrest to affect the country’s economy within the next 12 months.

If the pessimism continues, we expect Latin American CFOs will rethink their stance on cash reserves—or at least take a more conservative view of how much cash they can afford to allocate to capital spending and investment.

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