Corporate caution, financial market optimism
* Today we are launching our quarterly “UK corporate environment” chart book, which is available here: blogs.deloitte.co.uk/mondaybriefing/2019/07/uk-corporate-environment.html. The report aims to provide a graphical summary of the key trends and themes shaping the UK corporate sector, setting the context to the CFO survey. We will be developing and refining the chart book and welcome your feedback. Do feel free to use any of the charts in your own presentations and drop my colleague Tom Simmons a line at [email protected] with ideas and comments.
* Today’s Briefing summarises the findings of the latest Deloitte Survey of Chief Financial Officers which was released overnight. The full report is available at:
https://www2.deloitte.com/uk/en/pages/finance/articles/deloitte-cfo-survey.html
* The survey examined sentiment among the UK’s largest businesses in the second half of June. This coincided with the campaign for the leadership of the Conservative Party and growing concerns over global trade and growth.
* A more challenging environment is weighing on the corporate sector with risk appetite among UK CFOs falling to the lowest level since the failure of Lehman in 2008. Just 4% of CFOs say now is a good time to take risk onto their balance sheet with 96% disagreeing.
* Brexit is the top concern for CFOs, with geopolitical worries and trade fears in second and third position on the worry list. CFOs are now more pessimistic about the long-term impact of Brexit than at any time in the last three years, with a record 83% believing that it will lead to a deterioration in the economic environment in the long term. Events in the last three years have clearly added to, rather than reduced, worries about the impact of Brexit.
* UK unemployment hit a 45-year low in May while growth in average earnings has gathered pace over the last year. So, as well as contending with slower revenue growth, corporates also face mounting wage pressures. Almost half of CFOs say that recruitment difficulties have risen, up from less than a third 18 months ago.
* The hesitant mood captured by the CFO Survey is in marked contrast to the buoyant spirits recently on display in financial markets. Hints from the Federal Reserve and the European Central Bank of easier monetary policy to come have boosted equities. Ironically, risk appetite in the corporate sector has slumped just as it has taken off in the equity market.
* Equity valuations imply that investors believe that central banks will save the day. The downbeat mood of UK CFOs, one that is also on view in the German Ifo and the US ISM surveys, suggests business is less sanguine.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.7% at 7,553 as global equity markets were buoyed by hopes of a de-escalation in the trade war between the US and China.
Economics and business
* US job creation accelerated above expectations in June, rising to 224,000 from a disappointing May figure of 72,000
* US manufacturing activity slowed to its lowest level in over two years in June, in a sign that the trade war was hurting domestic growth
* UK PMI data showed services activity stagnant and manufacturing and construction activity falling in June, increasing fears the UK economy may have contracted in the second quarter
* BoE governor Mark Carney said that mounting global uncertainty might prompt policy action from central banks in “some jurisdictions”
* The implied probability of a reduction in the Bank of England base rate by the end of the year rose above 50%
* OPEC agreed to extend its production cuts for another six months in a bid to support prices
* Spanish manufacturing activity fell sharply into contraction territory in June, the worst reading in six years
* The UK is to explore mandatory disclosure of climate-related risks for listed companies and pension funds from 2022
* The National Trust announced it will stop investing in fossil fuels by 2020, removing £46 million from its total portfolio worth £1 billion
* Paris has banned over half of the cars registered in the region until the heatwave passes as the hot weather has been worsening pollution
* The London Stock Exchange relabelled a group of oil and gas companies as “non-renewable energy”, from “Oil & Gas providers” saying it would give investors “greater visibility to other forms of energy such as renewables”
* Norway’s sovereign wealth fund has lifted restrictions on a range of stocks that it had excluded from investing in on ethical grounds in response to reforms undertaken by these firms
* UK bookmaker William Hill is to close 700 betting shops, putting 4,500 jobs at risk
* Jaguar Land Rover is to invest nearly £1 billion to make electric cars in Britain
Brexit and European politics
* Estate agent Savills estimated that the value of housing stock in London has fallen by £40 billion in the past year
* The Financial Times reported that a number of Conservative MPs are preparing for a snap general election as they think that Boris Johnson as prime minister might either be forced to go to the polls or announce one to boost his majority
* UK retailer Sainsbury’s warned that a no-deal Brexit would be highly disruptive to food supplies
* The House of Lords voted last week to set up a joint parliamentary committee, comprising MPs and peers, to examine the possible impact of a no-deal Brexit, taking evidence from cabinet ministers, civil servants, businesses and trade unions
* Ratings agency Moody’s warned that the UK “would likely enter a recession” in case of a no-deal Brexit, putting further pressure on its Aa2 rating
* French carmaker PSA, which has committed to manufacturing its next Vauxhall and Opel Astra cars in the UK, highlighted that production of those models is conditional on the final terms of the UK’s exit from the EU
And finally… Chinese men in the city of Jinan have been banned from wearing so-called ‘Beijing bikinis’. Authorities are clamping down on men who roll their shirts up above their stomach to keep themselves cool, with people in the city complaining about the “uncivilised phenomenon” – hard to stomach