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Survey Reveals Decline in Risk Appetite among UK Finance Firms

canary wharfA survey of 122 chief financial officers (CFO) of UK’s biggest private firms and FTSE 350 companies revealed that the risk appetite and optimism of those heading the biggest corporate finance firms across the UK have fallen during the last three months.

David Sproul, the CEO of Deloitte, the world’s biggest professional services network, which conducted the survey, said:

Softening demand in emerging economies, greater financial market volatility and higher levels of risk aversion make for a more challenging backdrop for the UK’s largest businesses.

The survey revealed that CFOs’ perceptions of economic uncertainty is much higher than what it was five years back. About 75% of them said that they considered economic uncertainty as “above normal,” “high,” or “very high.”

Deloitte’s chief economist Ian Stewart said that the global environment, including the flow of news and market performance, is chiefly responsible for this viewpoint. He said:

In both areas, good news has been in short supply of late: UK equities down 16 per cent from their April peaks; US institutional investor optimism at 2009 levels; financial market volatility up sharply and more downgrades to emerging market growth forecasts.

However, he also said that the financial officers were optimistic about UK economy. They were rather more concerned about the rise in rate of interest and declining economies around the world, especially China.

The corporate risk appetite one year back was rather high, but now only 47% CFOs consider it to be an ideal time to take risks. According to Deloitte, this rising aversion to risk leads to increased defensiveness among larger companies, making them focus more on cutting costs and less on investing funds.

Only 41% CFOs were of the opinion that companies across the UK will increase expenditure in the following year. In the second quarter, two-thirds of the CFOs shared this opinion. Only 48% had plans to hire during the following year, compared to 70% in Q2.

According to Mr. Stewart, decline in risk appetite suggests that the Bank of England and the Federal Reserve were right to maintain low levels of interest rates. He said:

But despite the more emollient tone from central banks, CFOs still see tighter monetary policy as the number one threat to their businesses. From a central bank point of view this may be the worst of both worlds — a corporate sector which is worried both about slower global growth and about the prospect of higher interest rates.