In this article:

This content was correct at the time of publication and is no longer being updated.

Consumer Discretionary

Consumer discretionary, which includes luxury goods, entertainment and leisure, has seen the biggest jump in sentiment of the 10 sectors our analysts cover. It has gone from -0.7 last year to -0.2 this year - still in negative territory, but much improved. This reflects consumer strength in the US and China and low levels of unemployment in most developed economies, supporting consumption even of higher-value goods. However, this outlook is conditional on the recent outbreak of coronavirus in China. If it is well contained, it should only prove a short-term disruptor to the Chinese economy. If not, it may well cause global forecasts to shift downwards.

A more dovish policy stance from the US Federal Reserve and targeted Chinese stimulus are helping to buoy the sector around the world. Only 32 per cent of sector analysts report their companies are reacting to indicators associated with the end of the economic cycle, down from 60 per cent last year. But while fears of recession have faded, managements are feeling less confident than last year, highlighting the caution companies feel about the extension of the cycle. 

Increasing regulations may also be a headwind for returns in the year ahead, for example those concerning gaming in Macau, where tighter regulations “would depress VIP gaming demand”, according to one analyst. Protectionist measures could also be a headwind for the sector - three quarters of analysts report this will have a negative impact in the coming 12 months. The US and China may have signed an initial trade deal, but tensions between the two superpowers are likely to affect supply chain locations and long-term investment. 

Disruption is also a big theme. More than 60 per cent of analysts expect at least a moderate impact from disruptive trends like autonomous driving, the sharing economy, changes in consumption patterns such as food delivery, e-commerce and payments, and robotic supply lines. But these trends bring tremendous opportunities for those which can capitalise on them, at home and abroad. One analyst noted: “Around 50 per cent of my sector are disruptors, in many consumer markets.” And when asked which companies would outperform in the sector, many analysts cited product innovation as the key differentiator. 


Our analysts’ optimism about the healthcare sector is almost as strong as last year. The Sentiment Indicator is the highest of any sector for the second year in a row. Management teams are more confident about the year ahead, capex is expected to increase, while not a single analyst expects dividends to be cut. Just 7 per cent of analysts believe their companies are preparing for the end of the cycle - the lowest proportion of any sector.

The sector will also become a renewed focus for M&A activity this year, with over half of analysts citing it as a ‘big focus’ or ‘huge strategic priority’ at their companies. Companies are well-positioned to open their wallets, as balance sheets don’t look stretched, while our analysts report that funding costs and leverage will fall significantly from last year. Companies’ ability to push through price increases has jumped year-on-year, while cost inflation should not be a problem. 

In terms of risks, our healthcare analysts are most concerned about regulations on drug pricing, a reason why 62 per cent expect a negative impact from President Donald Trump’s policies as he has repeatedly called for action in this area. The US election cycle is also hurting confidence, given the risk of even more stringent regulations should Elizabeth Warren or Bernie Sanders win in 2020.

However, regulations are moving in the other direction elsewhere, along with accelerated drug approval policies, which could be positive for the sector. This was seen recently with a spate of innovations and streamlining of regulators in China. It’s therefore no surprise that 62 per cent of analysts expect companies to increase their investments into emerging markets, more than any other sector. 

But healthcare is a fast-moving and highly competitive industry, which is highly susceptible to disruption from medical technology firms. Our analysts expect product innovation and strong balance sheets to decide the winners and losers in the sector this year. 


Sentiment in the industrials sector lies at zero, marginally higher than last year. Over half of our analysts report the sector is in slowdown, having advanced from the mature stage of the cycle last year. But the nuance within this large and diverse sector is revealing. Global manufacturing has struggled over the past year, but the survey reveals signs of green shoots. Nearly three times as many industrials analysts expect their coverage universes to be to the ‘initial expansion or recovery’ stage in 12 months compared with today. 

The sector is facing multiple challenges that were apparent to our analysts even before the recent outbreak of coronavirus, including coping with weaker growth that could be exacerbated by the virus. “A handful of industrials are increasing restructuring or reducing discretionary expense items, like lower priority investments and travel budgets,” one analyst states. “Many are also turning to M&A as organic growth slows.” 

While capex for the sector overall is set to be lower than last year, some subsectors are compelled to keep spending. One sector analyst says: “Many automotive manufacturers are being ‘forced’ to increase capex to meet increasingly stringent emissions standards, keep up with the trend towards electrification, and develop autonomous technologies.” 

Geopolitics could also be a headwind. According to the same analyst, despite the phase one agreement between the US and China, the US and Europe may enter a period of tariff escalation, which could be particularly damaging for the auto industry given its dependence on cross-border flows. That said, previous concerns about the negative impact from the policies of President Trump have given way to a more positive view. He is expected to support the economy in an election year, with greater spending on defence and infrastructure that should support industrials. 


Sentiment in the financials sector indicates a modest improvement in fundamentals during the coming year, but there is a wide variation in the underlying components. Analysts expect return on capital to be lower than last year, driven by lack of pricing power and greater competition, while managements are also less confident to invest in their businesses. Providing support are strong balance sheets and increasing dividends - 45 per cent of analysts expect payouts to shareholders to be higher in 2020 than last year. 

When asked what stage of the cycle the sector is in, the most common answer is ‘mature stage of expansion’, narrowly beating ‘slowdown’. However, our analysts expect these positions to be reversed within 12 months - 45 per cent expect the sector to be in a slowdown phase, while only 31 per cent expect the sector to still be in the mature expansion stage. While loose monetary policy has been a boost for some sectors, the current low rate environment has reduced margins and returns on equity for many financial firms. With the outlook for rates remaining little changed this year, it’s no wonder that many management teams are feeling gloomy. 

More positively, the sector is expected to have a big increase in IT spending, particularly in the areas of security, software and cloud computing, as it tries to respond to disruption trends. Mid-office and back-office jobs are being automated, but it’s a race against time as fintech firms and robo-advisors are taking market share from legacy players and compressing fees. 

Consumer Staples 

The outlook for consumer staples looks relatively bright. The Sentiment Indicator for the sector is 0.4, the third highest behind healthcare and technology, indicating an expansionary environment and improving fundamentals compared with last year. 

Fears of the end of the cycle have been put on hold thanks to central bank action. Only 17 per cent of analysts in this sector say their companies are reacting to indicators associated with the end of the cycle, down from 43 per cent last year. Capex is also improving - a third of consumer staples analysts expecting capex to rise, balanced between growth and maintenance. Compare this to consumer discretionary where only a fifth of analysts expect year-on-year capex to increase. 

The sector stands out in its ability to pass on cost increases to customers. Only 8 per cent of analysts expect cost increases to be a problem due to lack of pricing power, while half are confident their companies would be able to raise prices if inflation were to rise. This year’s emphasis on ESG is also notable, with over 90 per cent of analysts report they are witnessing a greater desire to communicate and implement ESG policies at their companies, pointing to efforts in areas such as supply chains, health and safety, climate change and resource management. 

Information Technology 

Sentiment towards technology companies has increased to 0.6 from 0.5 last year, the second highest reading this year behind healthcare. None of our tech analysts believes the sector is in slowdown or recession compared to 28 per cent last year. “Everything went back to mid-cycle as soon as deterioration stabilised,” remarks one analyst. 

Our analysts report the sector looks set to benefit from a demographic tailwind - 65 per cent of technology analysts report ageing populations will have a positive impact on their companies, up from just 28 per cent when we asked the question a year ago. Management teams feel optimistic they can take advantage of opportunities in automation as the workforce gets smaller and healthcare technology as the population gets older. 

Analysts do not expect many firms will need to raise capital over the next year - the sector once again ranks amongst the lowest - due to the strength of balance sheets bolstered by large cash piles. Analysts also report their companies have the highest pricing power of any sector - 39 per cent state IT companies have the ability to increase prices by more than CPI. 

Politics, however, casts a shadow over the sector. More analysts report that management confidence to invest this year is falling than those that report confidence is growing. Some of this is due to the uncertainty of geopolitics in the year ahead. “Uncertainty means that many companies have less visibility on the operating environment and whether they can sell to certain customers,” one analyst noted. 

The policies of President Trump are a particular worry - 65 per cent of analysts expect a negative impact, the worst across the sectors and up marginally from 61 per cent last year. The ongoing trade war could fragment the global supply chain. Western companies are shifting production out of China, and investment decisions now require careful consideration due to lower visibility. Meanwhile Chinese companies are trying to diversify away from US suppliers by localising their supply chains, although this trend could be hampered by the coronavirus outbreak. However, while still a large issue for management teams, trade uncertainty is now accepted as the new norm and the recent phase one trade deal could provide some clarity. In fact, the most commonly cited risk factor for the year ahead was a synchronised global slowdown. But barring that, the sector looks set to continue its strong performance. 


The Sentiment Indicator for the energy sector is at a four-year low of -0.3, after a difficult 2019 marked by slowing global demand and some oversupply. Half of our energy analysts report management teams are less confident about investing in their businesses this year, and more than 60 per cent state their sector is in the slowdown phase of the cycle. Slower end demand growth is flagged by three-quarters of analysts as the key reason for declining returns. One analyst said: “A positive surprise would just be performing well, meeting expectations, as the general tone is bearish.” 

The sector has plenty of issues to tackle, with 42 per cent of analysts expecting more regulation, many of them to enforce stricter environmental standards such as carbon reduction targets, limits on sulphur in shipping fuels, or bans on fracking. But by far the biggest risk our analysts mention is that of softer global macroeconomic activity, which looks set to be norm for the time being, despite the cycle extension, especially in light of the recent outbreak of coronavirus. 

President Trump’s policies represent a mixed bag for the energy sector. While his administration supports industry deregulation in the US, the trade war puts pressure on Asian demand. 

In what might be a challenging year for the sector, our analysts expect those companies that take a sensible approach to capital allocation, including returning cash to shareholders where appropriate, to outperform their peers. 


Materials is the most downbeat sector this year with a plunge in the Sentiment Indicator to negative 0.9 from positive 0.3. Global economic activity slowed in 2019, trade declined sharply, and commodity prices spent the year treading water, causing management teams to reset expectations. And given we asked our analysts before the coronavirus outbreak, which looks set to impact all of the above, it is likely the outlook has deteriorated since then. 

Companies are moderating capex, adjusting production levels, lowering pricing to fight for market share, and focusing more on operational efficiencies. “Capacity is being mothballed to align supply with demand,” one analyst notes. This year analysts report a jump in the number of CEOs who see cost reductions as their main opportunity to grow earnings. All this is summed up by the sector having the biggest year-on-year drop in management confidence of any sector since 2016. 

A growing emphasis on government spending may offer some respite. The number of analysts expecting a positive impact from fiscal policies rose to 74 per cent from 36 per cent last year. As fiscal policy moves back up the agenda of governments around the world, materials is a sector that would certainly benefit from infrastructure spending in particular. 

The recent surge of interest in ESG issues weighs heavily on these companies - 68 per cent of analysts foresee more regulation, many of which will involve environmental targets. Unsurprisingly climate change – and the responses by government and society - is expected by 95 per cent of analysts to have a negative impact on their companies, a similar figure to the energy sector.

Geopolitics is still at the forefront of out analysts minds, since commodity prices are sensitive to macro uncertainty and domestic flare-ups. Nearly 80 per cent of analysts expect a negative impact on profitability from protectionist measures, higher than any other sector. Although the US-China trade war seems to have cooled down recently, tempering the risk of a Chinese downturn which would be catastrophic for commodity demand, other regions have their own issues.

One analyst reports: “Latin American countries seeing widespread unrest like Chile and Argentina are causing management teams to rethink long-term investment plans. Africa has seen a wave of royalty/tax increases which is also causing a rethink.” 

Investors should keep in mind the cyclicality of the sector. While 79 per cent of analysts believe the sector is in the slowdown or recession phase of the cycle at the moment, that number falls to 42 per cent when looking a year out, with a corresponding jump in those expecting the sector to be in the initial expansion stage. But just as manufacturing data was starting to show signs of life, the coronavirus impact may have extinguished the brighter outlook for materials. 


When asked what the scope for positive surprises this year was, one telecoms analyst quipped, “very little.” The Sentiment Indicator for the sector slipped into marginally negative territory, primarily due to deteriorating balance sheets - two-thirds of our analysts report balance sheets are stretched compared to only half last year. 

Other indicators, however, look brighter. Capital expenditure this year is forecast to increase at the fastest pace of any sector, spurred on by investment in 5G networks. Dividends are set to be similar to last year and while management enthusiasm has cooled in the last few years, it too is set to be broadly similar to last year. 

Geopolitics and regulation are occupying managers’ minds this year. Our analysts now expect President Trump’s policies to weigh on the sector. His actions against Huawei bring uncertainty for companies’ supply chains and 5G plans worldwide. And in what is already a highly regulated industry, 56 per cent of analysts expect more stringent rules this year versus only 11 per cent last year. 

One of the largest risks is the potential of increased competition, which would lower prices and force companies to spend more to attract and retain customers. Our analysts note that telecoms companies with established brands will be among the best performers this year, as well as those with strong balance sheets and lower leverage. 


A broadly flat Sentiment Indicator for the utilities sector overall disguises a more disparate picture under the surface. Returns on capital will take a significant dive this year due to negative regulatory changes and slower end demand growth. Balance sheets are looking more stretched than last year and this is feeding into weaker management confidence. Despite this, dividends in the sector remain compelling, illustrated by the fact that 40 per cent of our analysts expect companies to raise dividends, the second most of any sector after financials. 

However, the overarching narrative of the sector this year is the pivotal position utilities are planning at the forefront of the transition away from carbon-intensive energy. Ambitious renewable energy targets at companies will bring capital spending back to life this year - 70 per cent of analysts expect an increase this year. 

Analysts also expect fiscal policy to provide a notable tailwind this year. A great deal of the boost is expected to come from ‘green’ projects considering the ongoing groundswell in support of action to mitigate climate change, whether making necessary upgrades to power networks or building wind and solar farms. Additional announcements of any ‘green new deal’ spending plans would be a major boon to the sector. 

To finance investment to meet government renewables targets, utilities companies are taking the opportunity to issue and refinance debt at current low interest rates, often by issuing green bonds.

Utilities tend to be one of the most highly regulated sectors because of their provision of essential services. While regulatory changes are therefore always the biggest risk for the sector, it is striking to note that, this year, our analysts expect only a slight increase in regulation overall, and moreover the lowest expected increase of any sector (20 per cent of utilities analysts even expect less regulation). In this more benign environment, companies with strong balance sheets and good cash flows will be hard to beat this year. 

 Open the full PDF here 

Bob Chen

Bob Chen