Corporate fundamentals are now seen to be improving – in all regions and sectors. After three years of deteriorating sentiment, our annual Analyst Survey, encompassing the views of 146 equity and fixed-income analysts, has found there’s much more confidence among the world’s largest companies.
Demand growth is back, and we find signs of reflation, rather than disinflation. The largest improvements in our Global Sentiment Indicator are seen in the Eastern Europe, Middle East, Africa and Latin America region (EEMEA/Latam), and in China. In fact, the EEMEA/Latam score was the highest it’s been in our indicator’s four-year history, while China’s sentiment indicator recovered to a level last seen in 2014.
An oil fuelled recovery
Among the most striking findings are the swings in sentiment in the “old economy” sectors that did so poorly last year, particularly energy and materials. Almost all analysts of these sectors said key corporate indicators were deteriorating in 2016 but they are now optimistic for 2017. This optimism reflects the recovery last year in commodity prices, including oil, gas, iron ore, and copper, which has supported earnings growth, alongside continuing cost cutting.
Our proprietary Global Aggregates data (based on the summation of our individual company forecasts) mirrors these findings: energy analysts expect a whopping 81 per cent rise in net income globally this year, after last year’s sharp contraction (-35 per cent), with further improvement in 2018 (+22 per cent).
IT: The disruption winner
The survey also found strong resilience and optimism in IT, despite huge disruptive forces, indicating that change creates both risks and opportunities. More than half of all our IT analysts think management confidence is strengthening, feeding through into rising capital expenditure (mostly on growth investments rather than maintenance), increasing returns on capital, and higher dividend payments this year.
IT’s position is unique. It is the disruptor for all other sectors, but the sector itself is not disrupted by those other industries. To put it another way, there has yet to be a case of an Uber or Didi Chuxing being disrupted by a taxi firm.
Almost without exception, our analysts see stable or rising IT spending across sectors and regions. This does not just create work for IT developers; Gartner estimates that for every $1 spent on digital innovation/“ideation”, companies will spend another $7 on deploying the solution. Firms like SAP, Oracle, Microsoft, Temenos, IBM, Accenture, Infosys, Capgemini and Cognizant all stand to benefit from these trends.
AI, virtual reality and augmented reality may all change our world beyond recognition in the next few years, in the same way that social media and online connectivity have transformed consumer behaviour in recent years. In a benign macro-economic environment, with sustained or renewed growth in many of the world’s major economies, companies in all sectors will free up budget to avoid losing the technological arms race.
Knowing the risks
While our analysts are more bullish about the outlook for their sectors than in previous years, they do also warn of some material risks. Some risks are political; those have been attracting the most attention. But there are other factors to consider.
Disappointing economic growth and demand, especially in China, could change the outlook for companies, while larger-than-expected oil supply growth or demand weakness could lead to renewed oil price falls, undermining corporate conditions for energy and related sectors. Lastly, a tighter monetary policy in response to inflation could hasten the turn of the economic cycle.