From IAFEI October 2020 Quarterly Bulletin

By John Graham, D Richard Mead Jr. Family professor of Finance, The Fuqua School on Business, Duke University, and Phillipe Dupuy, Associate Professor, Accounting, Law and Finance, Grenoble Ecole de Management (EM)

IAFEI and a group of partners, including Grenoble EM, survey CFOs across the world. For the second quarter of 2020, the survey was running from the 25th of June to the 8th of July 2020. This writeup includes comparisons to results from the CFO survey conducted by Duke University and the Federal Reserve Banks of Richmond and Atlanta.

CFO business optimism jumps back from its all time low in many countries, thanks to government intervention.

Yet, optimism is not visible in the forecasts.

The CFO survey has been conducted for 90 seven consecutive quarters and spans the globe, making it the world’s longest running and most comprehensive research on senior finance executives.

Business Optimism Index

In Europe, the CFO optimism index jumped to 52 compared to 37 in the previous quarter. From a historical perspective, the confidence shock in Europe is greater than that caused by the collapse of Lehman Brothers in September 2008. But the rebound now observed is also historic in its strength.

The strongest rebound was in Germany, where we observe a confidence level of 65 compared to 39 in the previous quarter. Confidence levels also rebounded strongly in France from the low point reached in April. It now stands at 49.2 compared with 38 in the previous quarter on a scale of zero to 100. This level of confidence now indicates a stagnation of activity for the coming months rather than anticipation of a marked recession of the economy. As a sign of the return of a certain level of confidence, the indicator of financial soundness of the company stands at 66 against 41 in the previous quarter on a scale of zero to 100. This indicates are, supported by the government support plan, returned in June to the levels observed before the crisis. In the United States, the rapid spread of the pandemic is not affecting economic spheres: the business climate here has also rebounded strongly to reach 59.8 against 42 in the previous quarter.

Global optimism

Finally, at the global level, the confidence shock and rebound are also greater than in 2008 to 2009. However, they concealed significant disparities between, for example, the United States where confidence is high and Latin America where it is at its lowest. Despite the sometimes high confidence figures we fear that no economic area will really be able to take over growth for several quarters.

Concerns about customers and suppliers

The CFO optimism index points to a rapid resumption of activity, which in the charts would take the form of a V shape. This scenario seems unlikely, however, as the economy is expected to take many months to revive. In particular, companies could wait a long time before starting new major projects with industrial partners whose financial soundness they were wanted check first and foremost. The danger is not really the production gap we are currently experiencing, but rather is medium term impact on business relationships. Banks are showing reluctance to lend money to each other following the collapse of Lehman Brothers in 2008. Confidence suddenly disappeared. How could it be different today between firms suffering losses in turnover and cash flows ?

When we ask companies, nearly 90% of them tell us that they are still worried today about the financial solidity of their partners (customers and suppliers). Similarly, in the United States, the rebound in confidence indices is accompanied by an increase in recession expectations. Today more than 60% of US financial managers are expecting a recession by the end of 2020 in the US.

The rebound is not visible in the forecasts

The rebound in confidence indicators is not yet reflected in the forecasts. In France, for example, the outlook for revenue growth for the year 2020 remains on a downward trend at around minus 7% according to the central scenario. But in a pessimistic scenario, average turnover could fall by 14.5% compared to 2019. As a reminder, companies were still expecting revenues to grow by around 4% at the beginning of March 2020 before the crisis. As a result, companies are forecasting a contraction in investment of around 8% and the fallen salaries of around 3% over the year 2020. Finally, companies now expect the number of employees to fall by around 2% over the year. At the global level, the anticipated shock remains greater in certain regions, with sales expected to fall by around 25% in the most pessimistic scenarios, particularly in Latin America.

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