Directors upbeat despite global uncertainty

The Director Sentiment Index Second Half 2016 shows optimism about domestic business conditions despite political and economic uncertainty having a negative impact on overall sentiment, writes Angela Faherty.

Director sentiment has fallen five points to -22.5 in the second half of 2016, largely as a result of uncertainty relating to the global economy following the election of Donald Trump in the US. The downturn follows two consecutive periods of sentiment growth after an all-time low of -31.4 in the first half of 2015.

The latest figures from the Australian Institute of Company Directors’ (AICD) Director Sentiment Index Second Half 2016 (DSI) survey are reflective of the views garnered from 987 members between 20–31 October 2016 prior to the November US presidential election result.

Conditions improving

While the results of the US election and the UK’s vote to leave the European Union in June have dented director confidence in the global economy, the DSI shows that directors are more optimistic about business conditions domestically.

In some instances, key indicators are at their highest point in three years, with directors feeling more upbeat about domestic business conditions and the growth of their business than they have for a number of years. In fact, while global uncertainty has directors concerned, there are positive signs that business may be ready to take greater risks, invest more and hire more staff locally.

In particular, confidence relating to the general business outlook over the next 12 months has increased 10 points from earlier this year and confidence relating to the outlook for respondents’ own sector has increased four points. This is on trend with findings from all previous DSI results, which have demonstrated that directors view the conditions within their sector to be better than overall market conditions.

The high level of confidence for the general business outlook has translated into increased sentiment relating to the key indicators of staffing and investment levels. Both indicators are at their highest point since 2013 with directors expecting to employ more staff and increase investment over the next 12 months.

Crucially, directors are also increasingly optimistic about the growth of their business in the next 12 months, with only 18 per cent expecting their business to weaken in the coming year. Sentiment relating to the growth of their business is at its highest point since 2011.

Global economic outlook

Compared to the first half of 2016, the number of directors who forecast the health of the Australian (72 per cent), Asian (63 per cent) and US (80 per cent) economies to be “very weak” or “somewhat weak” over the next 12 months has increased significantly, with the outlook for the US witnessing the largest deterioration. Sentiment relating to the health of the European economy was also low, but has remained relatively stable compared to the first half of 2016.

Using a forward-looking approach, directors responding to the survey were asked to rate the health of world economies under the scenario of both a Donald Trump presidency and a Hillary Clinton presidency.

Directors were far more pessimistic about the health of world economies under a Donald Trump presidency which has, in turn, had a significant impact on the overall index. Notably, had Hillary Clinton won the US election, the overall index would have actually increased by 3.6 points from the last index, maintaining the upward trend of recent index results.

In fact, global economic uncertainty was identified by respondents as the number one challenge currently facing Australian business, with political uncertainty rated as the second most likely disruptor to current conditions.

The survey also illustrates a number of key concerns among the director community. When asked what issues are keeping them awake at night, 40 per cent of directors cited sustainability and long-term growth prospects as the number one business concern. Structural change and changing business models were second (26 per cent) with corporate culture (23 per cent) the number three concern. Business reputation in the community and legal and regulatory compliance also made the top five, sitting jointly in fourth place at 22 per cent.

Priorities for government

While volatility in the global economy has clearly had a negative impact on the perceptions of directors, the index found that director opinion on the priorities of government has not changed since the first half index.

With interest rates at an all-time low, directors are looking for the government to invest more in productivity-enhancing infrastructure. This is followed by taxation reform and addressing the budget deficit.

Interestingly, directors now identify renewable energy sources as the key area of importance for infrastructure investment, just ahead of regional infrastructure. The next priorities identified by the index were roads and telecommunications networks.

Directors were also asked to nominate the methods through which the Federal Government should address the federal budget deficit. Respondents said that smaller government (56 per cent), spending restraint (51 per cent) and welfare reform (46 per cent) should be priorities for the government to consider.

The index also clearly shows that directors are increasingly pessimistic about the effect of the Federal Government’s current performance, with almost 80 per cent perceiving a negative effect on consumer confidence. Close to 50 per cent of directors also view the current Federal Government’s performance as having a negative effect on their business decision-making.

Board and director issues

Shifting focus to the role of directors and the board, the DSI shows that recent coverage about business practices and its relationship with the community is weighing heavily on the minds of directors, as is the need for reform of the annual general meeting (AGM) system.

Directors continue to be pessimistic about the state of the current AGM system and only around 25 per cent of directors believe the current AGM system works well. When asked to identify reforms that they would support, 85 per cent of directors said yes to a discretionary right for all listed companies to hold a hybrid AGM (online and physical).

Approximately 80 per cent of respondents supported a requirement that all directors standing for election at an AGM be available to answer questions from members.