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Finance chiefs will pay close attention to the geopolitical climate and the threat of digital disruption in the coming year as they continue to face tough decisions related to capital spending and talent at their companies.
Here are some of the top issues CFOs and other executives will be following in the year ahead.
Making sense of geopolitical uncertainty
The geopolitical climate has a major effect on financial executives’ expectations and confidence. CFOs will be watching trade conflicts, Brexit and monitoring a potential global slowdown.
The U.S.-China trade war, which appears to be cooling off, has prompted U.S. companies to grow increasingly cautious. Tariffs on clothing and other imports took effect and some retail businesses relocated their factories out of China.
The trade war is part of the reason 56% of CFOs at U.S. companies said they are preparing for a recession, according to a survey conducted by Duke University’s Fuqua School of Business.
If a trade deal with China comes to fruition and if other global uncertainties subside early next year, sentiment surrounding initial public offering activity could pick up, according to Ernst & Young.
Trimming and tightening
Companies are expected to keep a lid on expenditures, in part because of fears of a downturn. CFOs surveyed in the third quarter by Deloitte Touche Tohmatsu predicted capital spending would grow by 3.6% over the next 12 months, down from their outlook for 9.4% growth a year earlier.
Expectations for capital expenditures have declined in recent years as companies look to slash costs and hoard cash. In the fourth quarter of 2019, expectations for capital spending not related to information technology reached their lowest level since early 2017, according to an outlook survey by the Association of International Certified Professional Accountants.
U.S. business investment was lethargic throughout 2019, dragging down U.S. economic growth in the second and third quarters and is likely to do little to bolster growth in the fourth quarter. Orders for nondefense capital goods excluding aircraft, a key metric for tracking investment, grew 0.1% in November from October, according to the Commerce Department.
However, technological advances have put pressure on companies to make certain investments. CFOs’ worries about the need to adapt and innovate will likely grow in 2020, as more companies adopt automation in an effort to build efficiency and gain an edge over rivals.
The hunt for talent
CFOs face a two-pronged battle for talent: the availability of personnel across the enterprise in a tight labor market and, specifically, the availability of qualified finance professionals to perform roles that increasingly require technological savvy.
Accountants increasingly need to be able to check whether algorithms are functioning correctly, evaluate potential weaknesses of results, and communicate them in the context of the business.
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“Very few CFOs we speak with feel their staff is adequately prepared to fulfill the finance mandate of driving growth through data analytics and digital transformation,” said Jeff Glenzer, executive vice president and chief operating officer at the Association for Financial Professionals, a Bethesda, Md.-based professional organization.
Talent remained the biggest challenge facing companies in the fourth quarter of 2019 for the 10th straight quarter, according to the AICPA’s outlook survey. And chief risk officers counted it among the top emerging risks in 2020, according to a survey by North Carolina State University’s Enterprise Risk Management Initiative and consulting firm Protiviti Inc.
Some employers have turned to short-term job training programs, or boot camps, to train workers for hard-to-fill jobs.
The race to issue bonds
If there are signs of optimism about the global economy, they will show up in financial conditions after solid gains in prices for stocks and bonds. Yields on corporate bonds would likely decline relative to benchmark Treasurys if the economy is perceived to be in solid condition, making credit risk attractive.
The bond market favors companies when interest rates are especially low, enabling them to borrow at more affordable rates. Major companies in 2019 were in a hurry to issue new bonds so they could capitalize on a nosedive in benchmark interest rates. They used the bonds to refinance short-term debt and help decrease interest expenses by swapping out existing debt with lower yielding bonds.
U.S. nonfinancial company debt remained near a record share of the economy in 2019 as investor appetite for debt securities with higher yields remained steady as government bond yields fell near record lows. The outlook is likely to remain favorable as long as the economy remains strong and low yields hold down the cost of servicing so much debt.
That momentum could continue into the new year if economic data remain strong and investors show optimism about the potential for a trade deal between the U.S. and China. Those factors contributed to a rebound in the riskiest part of the corporate bond market, reversing signs of weakness earlier in the year which had raised concerns for some investors about the risks of a recession.
Scouting the next big buy
Rising stock prices and low interest rates could help companies that want to grow through acquisitions next year raise the necessary capital. Many bankers who work in the merger field are optimistic that greater clarity about the prospects for a trade deal between the U.S. and China, and about the terms under which the U.K. will leave the European Union, could bolster the outlook for deals in the coming year.
Companies that can leverage the available capital and make adjustments in light of geopolitical and regulatory obstacles should be able to maintain M&A momentum.
Staying on top of the books
CFOs could face several new accounting standards and regulations in 2020.
The Financial Accounting Standards Board, which sets U.S. accounting standards, is focusing on the issues of differentiating liabilities from equity and improving the measurement of goodwill for at least the first half of next year. Many U.S. companies will have at least the next year to prepare for other accounting changes, due to delays of standards on lease accounting, hedge accounting, current expected credit losses and long-term insurance contracts.
Meanwhile, tax executives at international companies will continue to monitor a proposal by the Organization for Economic Cooperation and Development to introduce a global minimum tax. The plan could result in steeper tax payments for some businesses.
Many see semiconductor trends as leading indicators of technology and broader electronics demand. In a wider sense, semiconductor and tech stocks may be leading indicators for the economy and markets in general. Markets are currently at all-time highs, with Chinese trade talks progressing, in semiconductors especially, there seems to be more room to run higher.
If any industry is prone to cyclicality, it is the semiconductors, and that trend has been in place for going on 30 years. The long-term outlook remains reasonably bright.
The Chinese trade war hurt U.S. semiconductor firms in 2019, but the recovery was sharp. These suppliers have a relatively high “ship-to” revenue exposure to China. This high exposure to China puts the semiconductor industry at greater risk to the escalation in the U.S.-China trade war than many other segments of technology, but with talks progressing this seems to be in the rearview.
To mitigate this risk and concerns about picking the winners or the losers within the industry, exchange-traded funds offer a sampling and exposure to this market without an all-or-none risk in any single company’s stock. As the saying goes: “There’s an ETF for that strategy.” ETF Database has collected much of the information about these ETFs, among others, and made it easily accessible for those looking to get into the game.
Investors can use a number of ETFs to invest in the volatile semiconductor industry. As you will see, the top semiconductor ETFs are all constructed with different leaders and components dominating the returns and focus of each one.
iShares PHLX Semiconductor ETF (NASDAQ: SOXX) has been around since July 2001, and it aims to track the PHLX Semiconductor Sector Index. This fund seeks to track the investment results of an index composed of U.S. equities in the semiconductor sector. Note that this is the largest semiconductor ETF, with $2.35 billion in assets under management. Its overall expense ratio is 0.46%, and it traded up about 60% in 2019. This ETF has a total of 31 holdings. The top 10 holdings include mostly large-cap domestic semiconductor companies:
Texas Instruments (7.90%)
Advanced Micro Devices (4.35%)
NXP Semiconductors (4.08%)
Lam Research (4.07%)
Taiwan Semiconductors (4.06%)
VanEck Vectors Semiconductor ETF (NYSEARCA: SMH) has been around since December 2011 and aims to track the MVIS US Listed Semiconductor 25 Index. This fund seeks to track the overall performance of companies involved in semiconductor production and equipment. It has $1.49 billion in assets under management. Its overall expense ratio is 0.35%, and it traded up 62% in 2019. This fund has a total of 26 holdings. The top 10 holdings include a handful of large-cap U.S. semiconductors:
Taiwan Semiconductor (13.28%)
Advanced Micro Devices (4.97%)
Texas Instruments (4.97%)
Lam Research (4.55%)
SPDR S&P Semiconductor ETF (NYSEARCA: XSD) has been around since February 2006 and aims to track the S&P Semiconductor Select Index. The fund seeks to provide exposure to the semiconductors segment of the S&P TMI, which comprises the Semiconductors sub-industry. It has $505.8 million in assets under management, its overall expense ratio is 0.35% and it gained roughly 64% in 2019. This ETF has a total of 37 holdings. Its top 10 holdings include mostly domestic semiconductor firms:
Advanced Micro Devices (3.32%)
Skyworks Solutions (3.22%)
Cirrus Logic (3.19%)
Universal Display (3.17%)
ON Semiconductor (3.17%)
Invesco Dynamic Semiconductors ETF (NYSEARCA: PSI) has been around since June 2005. It aims to track the Dynamic Semiconductors Intellidex Index. This ETF seeks to track companies that are principally engaged in the manufacture of semiconductors. It was last seen to have $231.5 million in assets under management. Its overall expense ratio is 0.58%, and it traded up over 51% in 2019. This fund has a total of 31 holdings. The top 10 holdings include mostly domestic semiconductor firms:
Advanced Micro Devices (5.46%)
Texas Instruments (4.94%)
Applied Materials (4.91%)
Skyworks Solutions (3.10%)
JANUARY NEWSLETTER 1