Every year, we ask our credit and equity analysts at Fidelity International about the health, growth prospects, and challenges facing the companies they research worldwide. The results of our 2016 Analyst Survey are in, showing a maturing cycle in which growth is becoming scarcer.
For investors, this means understanding who will be the winners and losers has never been more important. Selectivity will be key.
So what do the results show? We found sentiment weaker across the board although, contrary to the general air of gloom, it’s no worse than neutral this year. Company fundamentals are neither improving nor deteriorating on average, even if the outlook is only improving in one country, Japan. Europe and the US are pointing to a maturing economic cycle, but there is no evidence at the corporate level that a fall into recession is imminent.
Japan: Robot revolution
Japan comes out on top with the highest sentiment score for all regions. Most industries are at a mature stage of expansion, they are funding growth cautiously, and more than half say they plan to increase the dividends they pay to shareholders.
Companies are learning to benefit from Japan’s ageing population, and the “robot revolution” is spurring investment as robotics appear everywhere from healthcare to housework. Meanwhile, the government’s Abenomics reform programme should help to strengthen corporate governance and boost returns.
Europe and the US: Cheap energy, wages rising
In Europe, our analysts are seeing slow and steady progress this year compared to 2015. Many companies have slimmed down, leaving them better able to deal with the challenges they face. Their finances are relatively stable and management teams’ confidence is holding up, while low energy costs have helped profitability. The European Central Bank’s measures to stimulate the economy should encourage M&A activity in the region this year.
The US is maturing and, although it is not imploding, it faces more difficult corporate conditions. As industry cycles mature, growth is becoming scarcer, which can be seen in earnings forecasts for the S&P 500. However, employment is rising and so are wages, which means consumers have more disposable income. Household debt is down, and energy is cheap, which should also support consumer spending.
Emerging economies: Mixed bag
Among the emerging regions, our analysts are most optimistic about Asia Pacific, although less so than they were last year. APAC is a mixed bag of very diverse countries so, although there are opportunities in entrepreneurial India and technologically advanced Taiwan and South Korea, other economies such as Indonesia and Malaysia still face headwinds.
Most China analysts say the industry cycle is maturing or even slowing, as companies adjust to a shift away from exports and towards domestic consumption. Return expectations have taken a hit, which has global repercussions. However, while China’s industrial heartland is suffering, spending patterns are evolving, with consumers focusing less on food and more on recreation and travel.
China’s transformation into a modern economy creates many exciting opportunities, but our analysts are telling us the road will be bumpy and overall growth will inevitably slow down, even if from a high base.
The biggest worry spots in emerging markets are Russia, Eastern Europe, Africa and Latin America, where sentiment has collapsed. Corporate conditions are difficult and could still get worse over the year.
Sectors and themes
Sentiment has weakened for almost all sectors, but we see a clear split in the outlook for the “old” and the “new” economy, which is driving a wedge between emerging and developed markets. “Old economy” sectors more dominant in emerging markets – energy, materials, utilities and industrials – have seen their scores drop significantly. This indicates that their troubles are not yet over, and that investment returns and dividends could be at risk this year.
By contrast, we see a strong force of innovation and disruption benefiting those “new” economy firms with high intellectual property content, and those that are tech-heavy, such as IT, healthcare, telecoms and media.
Consumption will also be a major theme in the future. Consumer staples and consumer discretionary have both risen in the sector ranking as analysts expect to see stronger conditions over the year.
Financials, meanwhile, are finely balanced: they are improving due to regulatory belt-tightening, but are weighed down by a low growth environment and low energy prices.
Of course there are risks. Rising uncertainty from emerging markets and China, and geopolitical concerns are key worries for our experts. But, overall, the biggest risk our analysts see to investment returns is an unexpected slowdown in demand. This makes sense – slowing demand would undermine the consumer story that is clearly one of the key factors for the relative health of the developed world. If the consumer doesn’t come through as we expect him (or her) to do, then all bets are off.