Shift in priorities
Equity finance now favoured over bank borrowing
Equity finance has returned to favour over bank borrowing for the first time in years amid predictions of prolonged high interest rates.
Since 2007 company finance chiefs have rated equity ahead of both bank borrowing and corporate bond issuance in only one quarter (Q2 2009), according to Deloittte’s survey of CFOs.
They now see the Bank of England’s base rate falling only slightly from its current level of 5.25% to 4.75% in a year’s time. Deloitte says this is consistent with market expectations that the UK is at, or close to, the top of the interest rate cycle.
CFOs have also become more cautious about taking on debt, with a net balance of 15% seeing UK corporates’ balance sheets as being overleveraged. Debt reduction is rated as a strong priority at 30%, the highest level recorded outside of the exceptional circumstances during the early stages of the pandemic.
Ian Stewart, chief economist at Deloitte, said: “Higher interest rates have flipped a decade-old consensus which was previously in favour of debt finance. This shift in thinking means that equity finance, which has been out of favour for years, is now seen as being more attractive than debt finance.
“Finance leaders are preparing for a period of high interest rates, with predicted rates falling only slightly over the next year. If realised, this would represent a period of tight monetary policy, the likes of which has not been seen since 2008.”
CFOs, on average, see the Bank of England’s base rate falling only slightly from its current level of 5.25% to 4.75% in a year’s time. This is consistent with market expectations that the UK is at or close to the top of the interest rate cycle.
Conducted between 19 September and 2 October, the survey captures sentiment amongst the UK’s largest businesses. A total of 70 CFOs participated, including the CFOs of 13 FTSE 100 and 26 FTSE 250 companies.
Levels of business confidence rose in the third quarter and are running slightly above average, with a net 9% feeling more optimistic about the financial prospects for their company than three months ago.
EY ITEM Club’s new Autumn Forecast says the UK should still avoid a recession, although GDP growth is set to remain sluggish for the remainder of 2023 and into 2024 amid headwinds from high interest rates and a weaker-than-anticipated labour market.
Following a better-than-expected start to the year, GDP growth expectations for 2023 have been upgraded slightly from 0.4% in July’s Summer Forecast to 0.6%.
Meanwhile, the EY ITEM Club’s 2024 GDP growth forecast has been nudged down from 0.8% to 0.7% thanks to the lagged effects of the recent interest rate rising cycle.
A likely end to rate increases at the Monetary Policy Committee’s (MPC) last meeting, combined with falling inflation and a return to real pay growth, should keep the economy from falling into recession, it says.
Inflation is now expected to fall slightly faster than was forecast in the summer, and could reach 4.5% by the end of 2023, before hitting the Bank of England’s 2% target during the second half of 2024.
In July, the EY ITEM Club expected inflation to end 2023 at just under 5%. Bank Rate is not expected to increase beyond its current level of 5.25%, and the EY ITEM Club says the MPC may start to cut Bank Rate from May 2024.