- After two years of analyst optimism, overall sentiment is delicately balanced
- Consumers and innovative, tech-heavy businesses prop up the outlook for Europe and the US
- Findings enriched by 17,000 1:1 meetings held each year between Fidelity’s analyst team and corporate decision-makers
2016 will see a maturing cycle with rising risks and an increasingly complex investment climate, but investors should look beyond this broad brush picture to avoid missing some of the key trends that look set to define the year, the annual Fidelity International Analyst Survey of 200 equity and fixed income analysts reveals.
The survey, providing insights into the expectations of company management teams across the globe, is the culmination of 17,000 1:1 meetings held each year between Fidelity’s analyst team and corporate decision-makers.A temperature check on the corporate sector, the survey reveals that Fidelity’s analysts are seeing increased weakness in company fundamentals and are generally less optimistic or more pessimistic than last year. The supply-side adjustment in the energy, materials and some industrial sectors is clearly weighing on their predictions, but the survey also identifies pockets of strength in other sectors, underpinned by three key trends:
The developed market consumer as a driver of growth
The consumer is expected to be the incremental driver of growth this year, supporting ongoing innovation that is changing the face of technology and healthcare in particular. As a result, the consumer sectors averaged a score of 5.6 on Fidelity’s sentiment indicator, more than 10% above the all-sector average.
As consumers’ purchasing power benefits from low energy prices, low inflation overall, supportive housing markets, wage growth and recovering labour markets, the survey finds that management confidence in both consumer staples and discretionary goods has turned neutral from negative. Returns in consumer staples are likely to rise on pricing power and demand growth, and discretionary analysts suggest that CEOs regard demand growth as the main source of earnings growth. In addition, strong balance sheets and falling leverage mean consumer companies do not need to raise much capital.
Michael Sayers, Director of Research at Fidelity International, comments: “Our most important new theme this year is the relative robustness of the consumer sectors compared to many others.
“As large swathes of the economy – energy, materials, industrials and utilities – are buffeted by low commodity prices and a global decline in capital expenditure, it may take years of capital scarcity to restore the capital and cost discipline necessary to bring equilibrium to supply and demand. While this is going on, it is crucial that the service side of the economy holds up if a global recession is to be avoided later in the year. Our survey’s findings offer encouragement in this area.”
For some time, Fidelity’s research has flagged the importance of innovation in a low nominal growth environment. When growth is increasingly scarce, companies or markets that are genuinely innovative attract a premium. The 2016 Analyst Survey bears this out very clearly. The impact of innovation is seen across almost all sectors and markets, but particularly so in healthcare and IT, shaping market opportunities and revenue streams.
The survey’s findings also reflect the fact that financials are changing under the influence of belt tightening and regulatory nudging, resulting in stronger balance sheets and lower leverage. These signs of fundamental improvement have been somewhat at odds with gloomy investor sentiment given that bank stocks underperformed even energy stocks globally in the latter half of 2015 and early 2016 – despite the decline in the oil price over this period. However, while the changes have been positive, risks remain.
Martin Dropkin, Head of Credit Research at Fidelity International, comments: “Financials still face some important risks, including a softer growth and inflation outlook, various forms of exposure to the energy sector, and lower bond market liquidity. Any weakness in financials can also lead to further softness in the real economy due to transmission mechanisms that can make market concerns self-fulfilling. Not surprisingly, regulation is expected to remain a significant factor yet, given the fact it encourages firms to increase their capital buffers, it should support sustainable returns in the medium term.”
Looking at the regional trends, Japan once again stands out as best in class in this year’s survey with a positive sentiment score of 6.3. While lower than last year’s score of 7.1, the score is impressive given rising caution elsewhere. The effectiveness of Abenomics’ third arrow of structural reform saw criticism in late 2015 when falling GDP meant another dip into recession, but our analysts remain optimistic that corporate reform will have a positive impact on the economy.
Fidelity’s analysts are a little more cautious in their views on Europe and the US, where they predict that company fundamentals will remain comparable to last year’s conditions. This is an important finding, indicating that the economic cycle in both regions is maturing, but not yet coming to an end.
The situation across emerging markets, on the other hand, is more worrisome, requiring investors to tread carefully. The economies that are hardest hit are those reliant on commodities, clustering in the Middle East, Africa and Latin America. Last year’s findings flagged this, pointing to deteriorating company fundamentals in this region, yet there are few indications so far that this trend could be bottoming out. The overall sentiment indicator score of 2.7 shows that the vast majority of our analysts expect things to get worse, before they get better.
China, too, saw its sentiment indicator score slide but the drop is much smaller, to 4.1 from 4.4 last year. On one hand, China's domestic corporate climate is deteriorating, with 71% of analysts reporting less management confidence to invest in their business this year. But the survey also shows globally 36% of analysts predict China’s slowdown will have no impact or be somewhat positive on companies’ strategic investment plans. The survey also reveals more European analysts (48%) predict no impact from China’s slowdown on the stocks they cover.
About the Analyst Survey
Fidelity International’s annual Analyst Survey covers all regions and sectors. It aims to identify changes in corporate conditions at an early stage and identify new trends and investment opportunities. The survey is based on Fidelity analysts’ in-depth coverage of their sectors and enriched by insights gained in numerous conversations with decision-makers at companies. On average, analysts conduct 17,000 company meetings each year. The views in the survey therefore reflect the perspectives of thousands of chief executive officers and other senior executives at companies from all over the world. It asks for views on confidence levels, as well as planned capital expenditure, expected returns on capital, the strength of the balance sheet and expected dividends returns among other things.
The sentiment scores are based on a scale of 1-10 with a score below 5 suggesting cooling sentiment and a score above 5 showing warming sentiment.
The summary of the report with infographics and charts is attached in this email. The full report can be downloaded on fidelity.fi / fidelity.no / fidelity.dk
For further information, please contact:
Maria Zachrisson, Senior Marketing Manager, Fidelity International
Phone no: +46 8 505 257 05
About Fidelity International
Fidelity International offers world-class investment solutions and retirement expertise. As a privately owned, independent company, investment is our only business. We are driven by the needs of our clients, not by shareholders. Our vision is to deliver innovative client solutions for a better future.
Established in 1969 as the international arm of Fidelity Investments, which was founded in Boston in 1946, Fidelity International became independent of the US organisation in 1980. Today it is owned mainly by management and members of the original founding family.