The new year is upon us, and with it comes the urge to speculate what the future will hold. Thanks to the results of TD Bank’s Annual CFO Survey — conducted to understand the outlooks of east coast financial executives on the state of their companies’ health — we won’t have to resort to crystal balls, tarot cards or eenie meenie miney mo. Instead, TD executives interpret data collected from 300 executives who make financial decisions for companies with annual sales of $50 million to $500 million or more.
This year, 56% of CFOs reported optimism in the U.S. economy and planned to invest in their companies to expand growth. Bill Fink, chief lending officer and head of Credit Management at TD Bank attributes this optimism to a myriad of factors, including little or no upward pressure on wages in most industries, stabilized or increased housing values in most markets, a continued decline in the unemployment rate and reduced gasoline prices, which have contributed to an increase in consumer discretionary income and spending.
“These factors are creating stable demand across many industries and lifting business,” Fink says. “This, of course, must be balanced by recent events such as the significant decline in commodity prices and volatility in the bond and equity market, stemming from uncertainty about certain foreign economies. Provided these current market challenges are short-term in nature, I believe a fundamental optimism will remain among executives throughout 2016.”
“The optimism is primarily being driven by pent-up demand and growth aspirations that were delayed due to the impact of the Great Recession,” adds Greg Braca, head of Corporate and Specialty Banking at TD Bank. “CFOs can now implement their plans as the economy slowly strengthens, supported by greater access to capital and improvement in the labor force.”
With blueprints for growth on the drawing board, 61% of CFOs expect to increase capital expenditures within the next year, up 11 percentage points from 2014 when only 50% of respondents had similar plans.
Anthony Sasso, president of TD Equipment Finance, says CFO optimism, coupled with plans for increased CAPEX, bodes well for the equipment finance industry. “Notwithstanding concerns about the global economy and current dynamics in sectors such as oil, the U.S. economy continues to grow and employment statistics continue to improve,” he says. “Economic growth, which is increasing equipment spending, coupled with a favorable rate environment should also drive growth in the equipment finance industry.”
“CFOs largely believe that the U.S. economy has turned the corner, evidenced by the Federal Reserve raising interest rates in December of 2015,” Braca says. “The U.S. economy is an outlier on the world’s stage, with relatively cheap access to capital and a job market and employment situation that continues to improve.”
Fink shares another statistic that demonstrates financial executives’ confidence in their companies’ performance this year: 69% of CFOs expressed optimism that 2016 would be an even better year than 2015. “We’ve also seen companies holding on to cash reserves for a few years, and they now realize it’s a good time to reinvest in the business to increase efficiencies and enhance productivity,” Fink says. “Investments in capital equipment, whether through purchasing or leasing, also are especially important to do before interest rates climb even more.”
So where do these confident CFOs plan to spend their money in 2016? According to the survey results, 58% plan to invest in technology (including hardware), 44% will improve existing facilities, 41% will amp up their data security, 35% will hire new employees, 28% will invest in new facilities, 24% will spend on non-technology office equipment, 20% will purchase heavy equipment, 19% will focus on M&A and 15% will fund environmental or sustainability projects.
Data Security Concerns
Although it is a new item on the survey, the number of CFOs who plan to invest in data security capital expenditures (41%) demonstrates the fact that risk management is definitely a critical concern for executives this year.
“No matter the industry vertical or market, folks we speak with are doubling down on data security,” says Braca. “They’re investing in technology to protect data in order to make their own processes more efficient and for ‘ease of use’ and peace of mind for customers. In fact, data security is not just a practical risk, there is headline risk involved. Reputational risk incurred during a hack or breach can be extremely damaging, so it’s no surprise that nearly half of survey respondents deem it a high priority.”
“There have been a number of high-profile incidents in the headlines over the past couple of years involving data security, so it’s no surprise that companies are taking this seriously to protect the business and their customers’ information,” Fink adds, noting that smaller firms —those with $50 million to $250 million in revenue — expressed more concern with risk liability in TD’s survey than large corporations. “This may be because smaller companies could be more vulnerable to attack and could be more greatly impacted financially in such an event. Along with making internal investments in data security, businesses should speak with their financial institutions to ensure proper controls are in place on accounts to limit unauthorized access.”
Borrowing Despite Rate Increases
According to the survey results, 74% of respondents indicated that an increase in interest rates would not impact their inclination to borrow. However, the survey was conducted in the fall of 2015, prior to the Fed’s first interest rate hike. Now that interest rates have increased, will CFOs still be inclined to borrow?
“Despite the turmoil in the markets to begin 2016, rates are still at historic all-time lows and will be for the foreseeable future,” Braca says. “CFOs will continue to look past this and realize that the combination of an improving economy, coupled with low rates equate to a great time to deploy capital.”
“The Federal Reserve interest rate increase was one of the most ‘unanticipated events’ economically,” Fink adds. “The Fed forecasted this was coming for a long time, so it wasn’t a surprise when it finally happened. Even with a 25 basis-point increase in interest rates, rates are still at historic lows, especially long-term rates. Companies with fixed-rate debt should have refinanced already, but since there hasn’t been a strong sense of urgency, many businesses who are eligible to refinance have failed to do so. December’s rate hike will motivate many of those businesses to act and take advantage of the low interest rates before any additional increases.”
Fink says there is a bigger-picture question at hand: business owners need to determine what will have more impact on their business — interest rates or the value of the dollar — and how that will influence their operations. “U.S.-oriented businesses will be most affected by the rate hike, while the strength of the dollar is more worrisome for companies that work internationally,” Fink says. “A company that maintains modest debt and adequate cash reserves will be better equipped to weather the downturn in export markets like Europe and Asia.”
Important Campaign Issues
Another concern on the minds of just about everyone in the U.S. — including CFOs — is the presidential election. Healthcare reform was the most prevalent economic issue, with 24% of respondents indicating a desire to have this issue addressed by presidential candidates.
“There has been an increased complexity placed on employers of size to provide adequate healthcare to employees, and by necessity it is an important topic for all companies to get right,” Braca says.
Other economic issues that CFOs would like to see addressed during this election include government efficiency (19%), job creation (14%), corporate taxes (13%), global competitiveness (8%), wage/income inequality (8%), business regulation (7%) and energy prices (5%).
While the results of TD’s CFO survey provide a forecast for a variety of issues that will affect financial executives in 2016, unfortunately, it could not predict the winner of the 2016 presidential election. That’s why we have Monitor’s mystery writer, Dexter Van Dango. Read his presidential predictions and TOP picks.