Global Investment Strategy

September 26, 2016

Chis Haverland, CFA, Global Asset Allocation Strategist

CFO Optimism Improves—but Concerns Persist

• According to the latest Duke/CFO Magazine Global Business Outlook survey, CFOs have become more optimistic about the U.S. economy over the next 12 months.
• Yet, the survey shows that capital spending, which has been weak during this recovery, is not expected to rise.

What it may mean for investors

• The latest CFO survey mirrors our own 2017 outlook for modest increases in economic growth, inflation and earnings.
• In this environment, we recommend that investors focus on high-quality assets, remain diversified (to mitigate volatility) and set a regular portfolio-rebalancing schedule.

Chief Financial Officers (CFOs) are responsible for reporting accurate (historical) financial information to key stakeholders—and for forecasting future results that incorporate economic and market trends which may impact their company’s future. To gauge the latest corporate and economic outlooks from CFOs, Duke University’s Fuqua School of Business and CFO Magazine produce the Global Business Outlook survey each quarter.¹ It includes responses from more than 1,200 senior financial professionals of both public and private corporations from around the world. The results can be used as a leading indicator for economic and financial conditions in the coming quarters.

The most recent survey released in September shows improving optimism for the U.S. economy. Overall economic optimism has risen for the second consecutive quarter, reaching the highest point since early 2015. The results, however, remain below the recovery peak and well below the levels seen prior to the financial crisis. Even with the higher reading, there are some lingering issues that could impede growth over the next 12 months. The top three concerns for the survey participants include economic uncertainty, attracting and retaining qualified employees, and regulatory requirements.

Oddly enough, the improved macro view did not lead to an uptick in the CFO individual company outlook, which slipped in the most recent quarter. Even so, the corporate revenue and earnings picture looks brighter—with both expected to grow in the next 12 months. Survey participants expect revenue to expand by 4.4 percent, while earnings are forecast to rebound by 7.3 percent. This coincides with our view that S&P 500 Index earnings per share will improve from an estimated $119 in 2016 to $127 in 2017 (a 6.7 percent year-over-year increase). This should provide support for the equity markets and allow for a modest increase in prices.

According to the survey, capital spending, which has been weak during this economic recovery, is expected to be flat to slightly negative over the next year. This has to do with uncertainty around the upcoming U.S. elections —as 52 percent of U.S. CFOs surveyed say they are delaying spending plans due to political risk. Furthermore, many respondents suggest that they will hold off on spending even after the elections as they (likely) wait for greater clarity from the newly-elected leaders. Meanwhile, the threat of interest-rate increases from the Federal Reserve does not appear to be a major concern for CFOs. Only one-third say that a 100-basis-point hike would limit spending plans, while only 12 percent say that a 50-basis-point increase would impact spending (the 50-basis point rise is our base case for 2017).²

The employment situation is expected to improve—with surveyed CFOs expecting U.S. job growth of 1.4 percent. As the unemployment rate declines, it will be more difficult for employers to retain employees and find qualified workers to fill open positions. The tightening labor market likely will lead to higher wages and salaries. CFOs forecast wages and salaries to rise by nearly 3.0 percent in the next 12 months. Inflation expectations (measured by the price changes in the products of CFOs’ own firms) have picked up as well, but remain below 2.0 percent for the coming year.

The results of the latest Duke/ CFO Magazine survey are not that different from our own 2017 outlook. We expect a modest increase in economic growth, inflation and short-term interest rates next year. In our view, corporate revenues and earnings will improve—providing a fundamental foundation for moderately higher equity prices. Overall, we believe that this low growth, low inflation, low-rate environment will lead to very modest investment returns next year. Therefore, we recommend that investors focus on high-quality assets, remain diversified (to mitigate volatility) and set a regular portfolio-rebalancing schedule.

¹ Duke/CFO Magazine Global Business Outlook Survey, 9/14/16.
² One basis point is equal to one-hundredth of one percent, or 0.01 percent (.0001). One percent equals 100 basis points.

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