Asia Pacific CFOs Optimistic on Profits

Asia Pacific’s leading chief financial officers (CFOs) are increasingly optimistic that revenues will rise in 2014 compared to last year, but are less optimistic on the outlook for profits, reports Bank of America Merrill Lynch (BofA Merrill).

In a survey of regional CFOs commissioned by the bank, 76% of respondents said they expect revenues in 2014 to rise, up from 72% in the same survey last year. However, just 60% of those surveyed expect profits to rise, down from 65% in 2013.

“Margin pressure is a real issue this year given the rising costs of doing business,” said Steven Victorin, BofA Merrill’s head of Asia Pacific corporate banking and global corporate banking subsidiaries at BofA Merrill.

“Costs associated with labour, materials and financing have been rising as the Fed normalises its monetary policy through tapering of its quantitative easing (QE) programme.

“Long-term rates may go up, and certain countries – such as India and Indonesia – already have hiked interest rates. We also have seen depreciation of some currencies last year, which equates to rising imported material costs.”

The BofA Merrill ‘2014 CFO Outlook Asia report’ surveyed 639 CFOs and other senior financial executives in the region. Close to 60% of them represent corporations with annual revenues of US$1bn and above.

Other key findings include:

  • CFOs in the manufacturing sector are the most bullish on both top line and bottom line expectations: 83% expect revenue growth, and 67% forecast higher profit this year.
  • On the effect of US Federal Reserve (Fed) tapering, 41% of CFOs agree that the end of QE in the US will lead to major problems in Asia, while 59% have no opinion or disagree.
  • Financial markets risks top CFOs’ list of concerns for 2014, with 36% most concerned about financial markets risks, followed by operational risk at 25% and macro-economic risk at 24%. In the financial markets risks category, CFOs are most concerned about currency volatility (35%), liquidity risk (30%) and interest rate movements (20%). Counterparty risk is at the bottom of the list at 15%.
  • Bank borrowing is the top choice for financing despite interest rate uncertainties: 57% of CFOs expect to finance their business with bank loans, more than doubling the 25% in 2013. Appetite for this mode of financing is highest in the manufacturing sector, with 66% of CFOs planning to use bank loans, followed by 64% in pharmaceuticals and 61% in the metals and mining sector. Internal sources of funding or self-funding was favoured by 29 percent of CFOs regionwide.
  • Political change does not seem to pose a threat to business as 86% of CFOs think any change will have a positive or no impact on their business. However, 26% rate political unrest as their highest enterprise risk.
  • In the space of mergers and acquisitions (M&A), the focus is on South and Southeast Asia this year, although overall there is a preference for organic growth over M&A throughout the region. Of those surveyed, 62% of CFOs do not plan to participate in M&A activity this year. Those who do will focus on Southeast Asia, emerging Southeast Asia (Vietnam, Myanmar, Laos and Cambodia) and India/South Asia. Interest in China has waned, with only 15% of CFOs indicating interest compared to 24% in 2013.

“Investment interest in Southeast Asia and India is holding up, despite Fed tapering concerns,” said Dr. Chua Hak Bin, head of emerging Asia economics at BofA Merrill.

“The tail risk seems to be China this year, where investors have turned more cautious. Concerns over shadow banking and more trust defaults will likely weigh on confidence for the rest of the year.”

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