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Latin American Business Outlook Part of the Global Business Outlook

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Presentation on theme: "Latin American Business Outlook Part of the Global Business Outlook"— Presentation transcript:

1 Latin American Business Outlook Part of the Global Business Outlook
A joint survey effort between Duke University Fundação Getúlio Vargas CFO magazine El IMEF PyME Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

2 Top Concerns of Latin American CFOs
1. Economic Uncertainty 2. Weak demand for product/services 3. Government policies 4. Access to capita 5. Cost of borrowing 6. Corporate tax code (domestic) 7. Cost of benefits 8. Employee productivity 9. Currency risk 10. Regulatory requirements Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

3 Business Optimism Index
Latin American CFO optimism continues to increase, led by Mexico and Peru. Global Trends June 2017 Response Country Business Optimism Index Country / Region Own-Firm Business Optimism Index CFOs in Latin America have become less optimistic about financial conditions in their home countries, with the average declining by approximately 10 points on a 100 point scale Latam CFOs no longer most optimistic in world Latam optimism has fallen below that in Asia and now equals US optimism Latam optimism still higher than in Europe and Africa Mexican CFOs are most optimistic Among Latam CFOs, those in Mexico, Peru, and Chile are most optimistic Brazilian optimism has fallen almost as low as in Argentina CFOs are relatively optimistic about the futhre for their own firms in Latin America and elsewhere around the world, with own firm optimism equalling about 65 on a 100 point scale Slide edge in emerging own-firm optimism CFO optimsm about their own firms is highest in Asian, Latin America, and in Africa US and European own-firm optimsm is not far behind Own firm-optimism highest in Mexico, Chile, Peru CFOs in Brazil are fairly optimistic about their own firms CFOs in Argentina, Eduador, and Colombia are less optimistic Own Company Notes: Presented data are the mean value for each region or country, Scale from 0-100 Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

4 Expected Product Price Inflation
Latin American inflationary expectations are similar as last quarter, highest in Mexico Global Trends June 2017 Outlook Product Prices Inflationary expectations moderate in Latin America Latin American CFOs expect highest price increases among all the regions CFOs in Asia expect no change in prices Inflation expectations highest in Mexico Of responding Latam countries, Mexico has the highest inflationary expectations Import prices drive some of the Latin American price inflation Notes: Presented data are the mean or median values for each region or country. Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

5 Expected Growth in Sales Revenue
Latin America sales revenue expectations decrease Global Trends June 2017 Outlook Revenue Latin American revenue growth decreases Revenue expectations decrease from last quarter Asian revenue growth expectations remain low Peru and Mexico expect most rapid revenue growth Overall Latin American revenues pulled down by Brazil and Ecuador Mexico expects rapid sales growth, due in part to relatively high inflation Notes: Presented data are the mean or median values for each region or country. Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

6 Capital Spending Plans
Latin American capital spending expectations remain the weakest among all continents in 2017 Global Trends June 2017 Outlook Capital Spending Modest capital spending plans Latin American CFOs expect little business spending growth Business spending is ramping up in Europe and Asia, softening in US Business spending varies within Latin America Mexico and Peru anticipate moderate growth in capital expenditures Spending expected to decline in Chile and remain almost constant in Brazil Notes: Presented data are the mean or median values for each region or country. Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

7 Expected Change in Earnings
Earnings growth expectations decline slightly from last quarter Global Trends June 2017 Outlook Earnings June 2017: Brazil dropped: mean=-16.9, median = -18.4 Latam earnings expectations soften Latin America and Europe have the lowest earnings growth expectations for the next year Africa expects the highest earnings growth, rebounding somewhat from very low levels Positive earnings growth in Latin America Peru and Chile have the strongest earnings expectations Earnings are expected to grow moderately in Mexico and Ecuador Notes: Presented data are the mean public company value for each region or country. Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

8 Fulltime Employment Outlook
Latin American CFOs expect little fulltime employment growth in 2017 Global Trends June 2017 Outlook # FT Employees June 2017: Brazil used median, mean=-8.2 Weak employment outlook in Latin America L.A. And African CFOs expect zero employment growth in 2017. Employment growth stays strong in US Employment growth varies across L.A. Expected employment reductions in Brazil, Peru, Chile and Ecuador pull down the average for all of Latin America Employment in Mexico is expected to grow Notes: Presented data are the mean value for each region or country #FT=Number of Fulltime Employees Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

9 Notes: Presented data are the mean value for each region or country
Expected Wage and Salary Increases Latin American wages and salaries are projected to increase by 3.8% in 2017 Global Trends June 2017 Outlook Wages & Salaries Dec 2016: Dec 2016 Ecuador median=0, mean = -4.8 Similar wage growth expectations cross all regions US expects wages to grow 4.1% in 2017, which is the highest among all regions Asia expects the lowest wage growth Latin American wages to grow 4% on average All participating Latam countries expect positive wage growth except Ecuador Wage growth in Brazil beats inflation Notes: Presented data are the mean value for each region or country Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

10 How Uncertain is the Current Business Climate?
Compared to the typical amount of uncertainty that your company faces, how would you rank the current level of uncertainty facing your firm? Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

11 Actions Taken in Response to Uncertainty
Compared to an average or normal amount of uncertainty, has the current amount of uncertainty about governmental policies and/or economic conditions led your firm to? Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

12 Best Practices When Uncertainty is High
What are the best practices for running a company when uncertainty is high about governmental policies and/or economic conditions? Stay the course Continue to pursue core strategies built on the companies’ strengths. For the most part, don’t expand into new projects that stretch the firm in new directions. Focus on what you can control. Be cautious Many firms pull back and operate very cautiously, making changes slowly. Some cut existing projects or cancel new projects but this is the exception rather than the rule Focus on the short-term Focus on getting through the short-term, remain flexible, but don’t lose sight of long-run objectives Reduce costs Carefully study analyses and scenarios Have a plan and contingencies for how to react if various scenarios occur. Hire consultants or other experts. Engage in risk management Be more active in risk management and hedging. Understand the economic outlook of various scenarios very well. Accumulate liquid assets Reduce financial risk by accumulating liquid assets, especially cash. Don’t increase debt loads. Take care of the customer Communicate more with, and take extra care of, key customers. -The most common strategy is to “stay the course”. By this companies mean not to become frozen into inaction, but to continue to pursue core strategies built on the companies’ strengths, focusing on what is under their control. For the most part, when uncertainty is high, this also means don’t expand into new projects that stretch the firm in new directions -Focus on getting through the short-term, remaining flexible, without losing sight of long-run objectives -Many firms pull back and operate very cautiously, making changes slowly … some cut or cancel projects but this is the exception rather than the rule -Reduce costs, though continue to take care of the core -Be more active in risk management and hedging.  Understand the economic outlook of various scenarios very well. -Many firms highlight the need to reduce financial risk by accumulating liquid assets, especially cash. Try not to increase debt loads. Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

13 Uncertainty About Policies/Conditions Slowing Expansion
About which if any of the following items is uncertainty (about policy details or timing, etc.) holding back your company's plans for expansion and new projects? Health: delay hiring, except perhaps health experts Regulatory: wait and see, monitor til dust settles Econ: delay investment, and a little less so: reduce hiring Tax: delay investment Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

14 Uncertainty About Policies/Conditions Slowing Expansion
About which if any of the following items is uncertainty (about policy details or timing, etc.) holding back your company's plans for expansion and new projects? Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

15 Hurdle Rates and Investment Decisions
What hurdle rate does your company use to evaluate investment projects? (red line) Does your company pursue all projects that are expected to earn a return > the hurdle rate? (gray and blue rectangles) Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

16 Why Not Pursue All Value-Enhancing Projects?
What prevents you from pursuing some projects that are expected to earn a return > hurdle rate? Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

17 Why Not Pursue All Value-Enhancing Projects?
What prevents you from pursuing some projects that are expected to earn a return > hurdle rate? Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

18 Why Not Pursue All Value-Enhancing Projects?
What prevents you from pursuing some projects that are expected to earn a return > hurdle rate? Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

19 Weighted Average Cost of Capital
US Europe Asia Latin America Africa What is your company's overall weighted average cost of capital (WACC) for 2017? 10.6 8.8 9.3 11.7 13.4 What cost of debt do you use in your WACC calculation? 7.1 6.7 6.5 12.2 Cost of equity? 11.8 10.7 8.2 13.7 Approximately what proportion of debt financing do you use in your WACC calculation? 36.4 30.9 29.8 33.4 28.3 Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

20 WACC vs Hurdle Rate Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

21 Why Do You Set Your Hurdle Rate > WACC?
So that we choose only the best available projects To ration – because we can’t pursue all projects To account for riskiness of projects being evaluated To account for costs not captured by WACC To provide a margin of error in calculations and in investment outcomes So that we earn excess return and increase firm value Hurdle rate is cost of equity, to ensure we create value for shareholders To help us select projects that are profitable every year Expect cost of capital/mkt conditions to increase/change in near future To preserve funding (because we have limited access to funds) Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

22 Peru’s reconstruction after flood
In aggregate terms, how will the reconstruction of Peru after the floods increase your company's revenue? Latin American Business Outlook Duke University / FGV / CFO Magazine Dec 2016

23 Return on Assets (ROA) Profit growth in Latin America is strong compared to US and Europe March 2017: Argentina too high: 21.1 & 23.3 Profit margins are expected to increase in all regions in 2017 except Africa CFOs in Latin America expect profits to grow as measured by ROA Mexico has the highest profit expectations Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

24 Duke/FGV Latin American Business Outlook in Press
The Latin American Business Outlook is frequently reported in the press Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

25 Duke/FGV Latin American Business Outlook in Press
The Latin American Business Outlook is frequently reported in the press Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

26 Latin American Business Outlook Part of the Global Business Outlook
A joint survey effort between Duke University Fundação Getúlio Vargas CFO magazine El IMEF PyME Latin American Business Outlook Duke University / FGV / CFO Magazine June 2017

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