HAPPIER IN ASIA
Asia’s CFOs are, pound for pound, more optimistic than their North American and European counterparts. But how realistic are the good tidings?
By Tom Leander

CFO optimism is on the rebound in Asia, leading to planned increases in M&A, capital spending, and hiring. For now the region’s CFOs are shrugging off fears of an overheating China, though nearly half of Asia’s CFOs expect China’s rate of growth to increase. This sanguine view stands in stark contrast to US colleagues, whose optimism fell to a five-year low.

These are some of the findings of the September 2006 Duke University/CFO Magazine Business Outlook survey, which asked CFOs from a broad range of global public and private companies about their expectations for the economy. The survey generated responses from more than 960 CFOs, including 208 from Asia.

Nearly two thirds (64%) of CFOs in the region are optimistic about the economy in the coming 12 months, up from 54% in the June survey. The main reasons: China’s expected growth of higher than 10%, and Japan’s reemergence to economic health. Expected substantial recovery in the euro-zone, a key trading partner for many Asian countries, has also buoyed Asian expectations.

The rosier view of the region’s economy has translated into plans for a 16% increase in capital spending, an 11% increase in employment, and a 13% boost in investment in advertising and marketing. However, expectations for earnings have decreased from last quarter. CFOs in Asia project earnings to grow over the next 12 months by 9%, down from 17% in June. The decline in earnings expectations reflects the expected long-term impact of higher energy costs and tighter monetary conditions (particularly in Japan, where interest rates are likely to be raised more aggressively next year).

Asia’s CFOs are also turning to M&A for growth. Some 43% of those surveyed intend to engage in mergers and acquisitions activity in the next 12 months, up from 36% in June. This indicates that as earnings expectations decline in the face of higher costs and competition, CFOs are looking to M&A as the logical path to growth. Asia’s CFOs also say that they will increase cash on the balance sheet by 1%. As cash holdings are already higher here compared to companies in the US and Europe, the region’s CFOs are under increasing pressure from shareholders to stop sitting on their warchests and seek more aggressive avenues to growth.

In the US, business optimism about the economy continued to plunge, with nearly half of CFOs more pessimistic and only 19.8% more optimistic. The degree of optimism is at its lowest level in the four years that CFO optimism has been surveyed.

Also for the first time in the survey’s history, weak consumer demand has become the number-one worry in the US. Among firms that sell directly to consumers, 34% say they will slash hiring plans if consumer demand weakens, and 29% will cut capital spending. Another 19% will scale back their orders from other firms.