The Deloitte CFO Survey

The Deloitte CFO Survey Brexit tops risk list This quarter s CFO Survey is the first to be conducted since the announcement that the UK s EU membership referendum will take place on 23rd June. It shows a marked rise in support for the EU among Chief Financial Officers. 75% of CFOs say they believe it is in the interests of UK business for the UK to remain in the EU, up from 62% in the fourth quarter of 20. 8% of CFOs favour leaving the EU, up from 6%. The EU scores high marks with CFOs for its beneficial effects on UK exports, inward investment and financial services. At the opposite end of the scale only % of CFOs think UK business and the UK economy benefit from the EU s legal, regulatory and compliance framework. The dominant concern for CFOs is the forthcoming EU referendum. It tops the corporate worry list, eclipsing longstanding concerns about emerging markets and growth in the euro area. While CFOs see rising risks attached to the referendum, concerns around the other seven major macroeconomic categories of risk (see chart 4) have reduced or remained unchanged in the last three months. Growing concerns about Brexit seem to be behind a marked increase in CFO perceptions of financial and economic uncertainty. It now stands at levels last seen in early 20, at the tail end of the euro crisis. Risk appetite has also suffered, with the proportion of CFOs saying that now is a good time to take risk dropping from 51% to 25% in the last year. With the storm clouds gathering CFOs have maintained a focus on reducing costs and increasing cash flow. Enthusiasm for expansion has taken a knock too. Corporates are pulling in their horns, with expectations for hiring and capital spending at three-year lows. Despite growing concerns about the forthcoming EU referendum, 53% of CFOs say they have not made, and are not in the process of making, contingency plans for a possible UK exit from the EU. 26% say they have made, or are making, such plans. It may be that the continued, albeit narrowing, lead for the remain camp in the opinion polls, means that many corporates see a UK exit from the EU as being a fairly low probability event. Authors Ian Stewart Chief Economist 020 7007 9386 istewart@deloitte.co.uk Debapratim De Senior Economic Analyst 020 7303 0888 dde@deloitte.co.uk Alex Cole Economic Analyst 020 7007 2947 alecole@deloitte.co.uk Contacts Ian Stewart Chief Economist 020 7007 9386 istewart@deloitte.co.uk Richard Muschamp CFO Programme Leader 020 7007 0724 rmuschamp@deloitte.co.uk Chart 1. Favourability of EU membership % of CFOs who gave the following responses when asked whether it is in the interests of UK businesses for the UK to remain a member of the EU 8 7 6 5 3 1 62% Yes 75% 20 6% No 8% 4% 17% Don't know, no strong opinion, prefer not to say 28% Too early to say: Depends on results of renegotiation* For current and past copies of the survey, historical data and coverage of the survey in the media and elsewhere, please visit: www.deloitte.co.uk/ cfosurvey * Option provided to respondents in the 20 survey, prior to the renegotiation in February April

2 CFO Survey Brexit tops risk list Focus on EU referendum A majority of CFOs report that their businesses have not made, and are not in the process of making, contingency plans for a possible British exit from the EU. Chart 2. Preparedness for a UK exit from the EU % of CFOs whose businesses have made, or are in the process of making, contingency plans for a possible British exit of the EU 26% say they either have such plans or are developing them. Prefer not to say Yes 26% No 53% A large majority of CFOs think UK business and the UK economy have benefited from EU membership in terms of improved export performance, facilitating connections with other euro area nations and attracting foreign direct investment. However, only % consider the EU s legal, regulatory and compliance framework as beneficial. Chart 3. Benefits of EU membership % of CFOs who consider UK businesses and the UK economy to have benefited from EU membership in the following areas UK export performance 89% Facilitating connections with other euro area nations Attracting foreign direct investment The free movement of people 78% 87% 86% The success of UK financial services 71% UK influence in and connections with the rest of the world 68% The legal, regulatory and compliance framework % 6 8

CFO Survey Brexit tops risk list 3 Uncertainty rises CFOs rate the upcoming referendum on EU membership as the greatest risk facing their business. Deflation and economic weakness in the euro area, and weak demand in the UK also remain prominent risks. Consistent with more doveish messages coming from the Bank of England and the US Federal Reserve, the risk posed by interest rate rises has receded significantly. CFOs are significantly less worried about emerging market weakness and geopolitics in Ukraine and the Middle East. Chart 4. Risk to business posed by the following factors Weighted average ratings on a scale of 0 0 where 0 stands for no risk and 0 stands for the highest possible risk The UK referendum on membership of the EU Deflation and economic weakness in the euro area, and the possibility of a renewed euro crisis Weak demand in the UK The prospect of higher interest rates and a general tightening of monetary conditions in the UK and US Weakness and/or volatility in emerging markets and rising geopolitical risks in Middle East/Ukraine A bubble in housing and/or other real and financial assets and the risk of higher inflation Planned cuts in UK public expenditure under this parliament Poor productivity/weak competitiveness in the UK economy 36 37 37 40 40 41 44 43 50 48 48 46 48 49 20 50 54 30 35 40 45 50 55 60 Rising concerns over the upcoming referendum on EU membership and euro area weakness have fed through to CFO perceptions of uncertainty. 83% of CFOs now rate the level of external economic and financial uncertainty facing their business as above normal, high or very high, the highest reading in more than three years. Chart 5. Uncertainty % of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high 95% 85% 75% 65% 55% 45% 20 Corporate risk appetite, which tends to move broadly in line with equity markets, has dropped to a three-year low despite a rally in the FTSE 0 since early February. Rising uncertainty seems to be weighing on risk appetite with just 25% of CFOs saying that now is a good time to take greater risk onto their balance sheets, down from 51% a year ago. Chart 6. Corporate risk appetite and the FTSE 0 % of CFOs who think this is a good time to take greater risk onto their balance sheets and the FTSE 0 price index 8 7 6 5 3 1 2007 08 08 FTSE 0 (RHS) Risk appetite (LHS) 7400 6900 6400 5900 5400 4900 4400 3900 3400

4 CFO Survey Brexit tops risk list Defensive strategies in favour Introducing new products and services or expanding into new markets is the top priority for CFOs. However, CFOs overall balance sheet stance remains defensive with cost reduction and increasing cash flow ranked in second and third places. Chart 7. Corporate priorities in the next months % of CFOs who rated each of the following as a strong priority for their business in the next months Introducing new products/services or expanding into new markets Reducing costs Increasing cash flow 37% 43% Expanding by acquisition 18% Increasing capital expenditure 16% Reducing leverage % Raising dividends or share buybacks % Disposing of assets % 1 3 5 The mix of balance sheet strategies remains close to the most defensive in three years. Chart 8. CFO priorities: Expansionary vs defensive strategies 39% 37% 35% 33% 31% 29% 27% 25% 23% 21% 19% 20 20 20 20 20 20 20 20 20 Defensive strategies 20 Expansionary strategies 20 Arithmetic average of the % of CFOs who rated expansionary and defensive strategies as a strong priority for their business in the next months. Expansionary strategies are introducing new products/services or expanding into new markets, expanding by acquisition and increasing capital expenditure. Defensive strategies are reducing costs, reducing leverage and increasing cash flow.

CFO Survey Brexit tops risk list 5 Factors affecting investment For the first time in more than three years, a net balance of CFOs expect hiring and capital expenditure by UK corporates to decrease over the next months. They also anticipate cuts in discretionary spending, where expectations have fallen to a three-year low. Chart 9. Outlook for capital expenditure, hiring and discretionary spending Net % of CFOs who expect UK corporates capital expenditure, hiring and discretionary spending to increase over the next months Increase Decrease 8 6 - - -6-8 - 20 Capital expenditure Discretionary spending Hiring Chart compares the effect of ten key factors on corporate investment plans between the third quarter of last year and now. The further away a coloured line is from the centre, the more the factor acts to support investment. Readings below five indicate that the factor acts as a depressant on investment. Uncertainty about the economic and financial environment, and over a possible UK exit from the EU continue to be the biggest constraints on investment. Fiscal consolidation in the UK and the slowdown in emerging markets are the next biggest depressants. The main factors supporting investment are UK growth prospects, easy access to external finance and rising demand for businesses products and services. Chart. Factors affecting corporate investment plans CFOs assessment of the effect of each of the following factors on their investment plans: On a -point scale where 0 implies the most negative effect and the most positive Secular or long-term growth for your products or services Cost and availability of external finance Uncertainty about the economic and financial environment 9 8 7 6 5 4 3 2 1 0 More positive Uncertainty over a possible UK exit from the EU Fiscal consolidation in the UK (tax rises, cuts in public spending) Actual or expected levels of economic activity/gdp growth in the UK Actual or expected levels of economic activity/gdp growth in emerging markets Availability of internal finance Actual or expected levels of economic activity/gdp growth in the rest of the world (including the US, Japan and Asia-Pacific) Actual or expected levels of economic activity/gdp growth in the euro area 20 Effect over last months Effect over last months

6 CFO Survey Brexit tops risk list Easy access to finance Financing conditions remain benign for the large corporates on our survey panel. However, with the Bank of England carefully considering the timing of its first post-crisis rate rise, CFOs report a modest tightening in conditions. Chart. Cost and availability of credit Net % of CFOs reporting credit is costly and credit is easily available Credit is costly Credit is cheap 8 6 - - -6-8 - 2007 08 08 Cost of credit (LHS) Availability of credit (RHS) 16 8 6 - - -6-8 - Credit is available Credit is hard to get Debt finance bank borrowing and bond issuance remains the most attractive source of funding for CFOs. Equity issuance is less appealing, with its attractiveness down to the lowest level in three years. Chart. Favoured source of corporate funding Net % of CFOs reporting the following sources of funding as attractive Attractive Unattractive 8 6 - - -6 2007 08 08 Bank borrowing Bond issuance Equity issuance 16 CFOs expectations for inflation have declined in the last three months. of them expect inflation to hover around the Bank of England s 2. target in two years time. A growing majority anticipate considerably lower inflation, with almost 6 expecting it to be either negative or between 0 and 1.5%. Chart. Inflation expectations % of CFOs who expect consumer price inflation in the UK to lie between the following ranges in two years time 7 6 5 3 1 1% 1% Below zero 51% 0-1.5% 58% 44% 1.6%-2.5% 4% 2% Above 2.5% 20

CFO Survey Brexit tops risk list 7 CFO Survey: Economic and financial context The macroeconomic backdrop to the Deloitte CFO Survey The International Monetary Fund cut its forecast for global growth this year and next. Growth in emerging markets remained subdued, led by a continued slowdown in Chinese activity. The euro area continued its modest recovery and the European Central Bank surprised markets with a bigger and broader range of monetary easing initiatives than had been anticipated. The Bank of England cut its growth forecasts for the UK economy and signalled that interest rates are unlikely to rise this year. The US economy remained a source of relative optimism, with a growing number of economic indicators surprising on the upside. Nonetheless, the Federal Reserve further scaled back its forecasts for rate rises in. Japan s central bank unexpectedly lowered interest rates into negative territory in another bid to boost growth and inflation. British opinion polls suggested a further narrowing in the margin of public support for EU membership against the backdrop of a continuing migrant crisis in Europe and the resignation from the UK Cabinet of Iain Duncan Smith, a prominent supporter of Brexit. Amid uncertainties around the vote and a weaker growth outlook the pound weakened further. The oil price rose by over a third, from the -year low reached in late January, to just under $40 a barrel by late March. Chart. UK GDP growth: Actual and forecast (%) Chart. FTSE 0 price index 5 Forecasts 7000 3 UK recovery steady 6500 6000 1 5500-1 -3-5 Year-on-year growth Quarter-on-quarter growth 5000 4500 4000 3500 The FTSE 0 has rallied since February -7 3000 2007 2008 20 20 20 20 20 20 20 2017 2008 20 20 20 20 20 20 20 Source: ONS, consensus forecasts from The Economist and Deloitte calculations Source: Thomson Reuters Datastream Chart 16. UK private and public sector job growth (thousands) 600 500 400 300 200 0 0-0 -200-300 Strong growth in private sector jobs -400 2007 2007 2008 2008 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Chart 17. UK annual CPI inflation (%) 9 8 7 Inflation back in positive territory 6 5 4 3 2 1 0-1 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20 20 20 Source: Thomson Reuters Datastream Private Public Source: Thomson Reuters Datastream

8 CFO Survey Brexit tops risk list Two chart summary of key survey messages Chart 18. Uncertainty % of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high Chart 19. Outlook for capital expenditure, hiring and discretionary spending Net % of CFOs who expect UK corporates capital expenditure, hiring and discretionary spending to increase over the next months 95% 85% 75% 65% 55% 45% 20 20 20 20 Q2 20 20 20 20 Q2 20 20 20 20 Q2 20 20 20 20 Q2 20 20 20 20 Q2 20 20 Increase Decrease 8 6 - - -6-8 - Capital expenditure Hiring Discretionary spending 20 20 20 20 Q2 20 20 20 20 Q2 20 20 20 20 Q2 20 20 20 20 Q2 20 20 20 20 Q2 20 20 About the survey This is the 35 th quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The first quarter survey took place between 8th and 21st March. 0 CFOs participated, including the CFOs of 20 FTSE 0 and 55 FTSE 250 companies. The rest were CFOs of other UK-listed companies, large private companies and UK subsidiaries of major companies listed overseas. The combined market value of the 84 UK-listed companies surveyed is 360 billion, or approximately 17% of the UK quoted equity market. The Deloitte CFO Survey is the only survey of major corporate users of capital that gauges attitudes to valuations, risk and financing. To join our panel of CFO respondents and for additional copies of this report, please contact Anthea Neagle on 020 7303 06 or email aneagle@deloitte.co.uk. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 98. Designed and produced by The Creative Studio at Deloitte, London. J5537