Report from the European boardroom: 2014 looks bright

In 2014 European chief financial officers expect a positive change in the economic conditions of their company and industry. The number of European CFOs that have a favorable outlook on the performance of their own company has reached a level not observed since 2010. Financial executives expect to spend more on Technology, R&D, and Advertising & Marketing. These are some of the findings of the latest CFO Survey conducted jointly by TIAS School for Business and Society and Duke University.

Optimism in regions outside Europe

Economic sentiment has improved substantially among financial executives in emerging regions. The number of optimists has increased to 47% in Asia (up from 22%) and 27% in Latin America (up from 14%). In the US, sentiment about the economy remains moderate, with one third of the CFOs being more optimistic and almost one third being less optimistic. Nevertheless, more than 50% of the US CFOs do believe that business conditions will improve in 2014. Whether companies in the US are indeed able to capitalize on this remains unclear; only 38% of the financial executives in the US are more optimistic about the outlook of their own company.

Optimism remains positive among European CFOs

With 45% of CFOs being more optimistic, the economic outlook for the next twelve months remains positive in Europe. This positive sentiment is pervasive and translates to optimism on both sector and firm level. For instance, about half of the European CFOs indicate that economic conditions for their industry as a whole have deteriorated to some extent during 2013. But almost 50% also believe that industry conditions will actually improve in 2014. As one out of five financial directors also predicts that their sector will outperform the overall stock market, the anticipated uptick in 2014 could be substantial. According to more than a quarter of the executives, we should also expect to see increases in the average purchase price for target companies in their particular industry.

On the company level we notice similar encouraging indicators that point towards a favorable year ahead of us. More than half of the CFOs believe that business conditions for their firms will improve in 2014, relative to somewhat weak conditions in 2013. This adds to the confidence that European CFOs have in the performance of their own company during the next twelve months. No less than 49% of the financial executives are more optimistic about the financial outlook of their own company, a level not observed since 2010.

European companies adjust their spending patterns for 2014

Throughout 2013 capital spending has been moderate but positive. This fourth quarter however, CFOs in Europe actually indicate that capital spending will slightly decrease during the next twelve months. Business spending on Technology, R&D, and Advertising & Marketing on the other hand, is expected to increase (by 5.5%, 4.1%, and 6.3% respectively).

“This shift may indicate that during 2013, companies have focused predominantly on improving their competitive strength by acquiring new, or upgrading existing, assets; data supports this view as the average return on assets in 2013 was about 7%, while CFOs expect to realize an average return on assets of 9% in 2014. In anticipation of more favorable market conditions next year, companies now seem to prefer directing their financial resources towards the development and marketing of products and services. Following such strategy, they would be well-positioned when consumer demand finally starts to pick up pace again”, says Kees Koedijk, dean and director of TIAS.

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Quarterly report Q4 2013, CFO Survey (2013)