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Asia Pacific CFOs Bullish on Revenues, Less so on Profits

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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.

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

“Margin pressure is a real issue this year given the rising costs of doing business,” said Steven Victorin, head of Asia Pacific Corporate Banking and Global Corporate Banking Subsidiaries at Bank of America Merrill Lynch. “Costs associated with labor, materials and financing have been rising as the Fed normalizes its monetary policy through tapering of its quantitative easing program. 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 Bank of America Merrill Lynch 2014 CFO Outlook Asia report surveyed 639 CFOs and other senior financial executives in the region. Close to 60 percent of them represent corporations with annual revenues of US$1 billion and above.

Now in its third edition, the report offers insight into the strategies deployed by key financial decision makers across multiple industries and 12 economies, with a 50-50 split this year between respondents from multinational corporations and large local companies. Interviews were conducted in Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

Other key findings include:

  • CFOs in the manufacturing sector are the most bullish on both top line and bottom line expectations: 83 percent expect revenue growth, and 67 percent forecast higher profit this year.
  • Effect of Federal Reserve (Fed) tapering: A minority (41 percent) of CFOs agree that the end of quantitative easing in the U.S. will lead to major problems in Asia, while 59 percent have no opinion or disagree.
  • Financial markets risks top CFOs’ list of concerns for 2014: 36 percent are most concerned about financial markets risks, followed by operational risk at 25 percent and macro-economic risk at 24 percent. In the financial markets risks category, CFOs are most concerned about currency volatility (35 percent), liquidity risk (30 percent) and interest rate movements (20 percent). Counterparty risk is at the bottom of the list at 15 percent.
  • Bank borrowing is the top choice for financing despite interest rate uncertainties: 57 percent of CFOs expect to finance their business with bank loans, more than doubling the 25 percent in 2013. Appetite for this mode of financing is highest in the manufacturing sector, with 66 percent of CFOs planning to use bank loans, followed by 64 percent in pharmaceuticals and 61 percent in the metals and mining sector. Internal sources of funding or self-funding was favored by 29 percent of CFOs regionwide.

Political change does not seem to pose a threat to business as 86 percent of CFOs think any change will have a positive or no impact on their business. However, 26 percent 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 percent 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 percent of CFOs indicating interest compared to 24 percent 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 Bank of America Merrill Lynch. “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.”

To download the Bank of America Merrill Lynch 2014 CFO Outlook Asia report, please visit http://www.baml.com/cfooutlookasia.

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