Global breakdown

USA: A second wind?

Sentiment indicator 6.6 vs 6.2 last year

Analysts continue to be positive about the US even after a strong 2017. The sentiment indicator has ticked up to 6.6, exactly in line with the global average. Dividend growth is the main contributor to its sentiment indicator increase, with two thirds of analysts predicting their companies will increase pay outs - that’s more than for any other region.

What is worrying many investors about the US is that the US Federal Reserve might raise interest rates more quickly and more frequently than expected if wage inflation accelerates driven by low unemployment. Among our US analysts 65 per cent expect a moderate rise in wages, but only 12 per cent expect a strong rise. That suggests our analysts expect low unemployment to have an upward pressure on inflation, but in a controlled way.

President Donald Trump’s policies are expected to have a moderately positive impact by most analysts. Meanwhile, over 40 per cent of analysts say there will be less regulation - an optimism shared by almost no other analysts elsewhere in the world. One of Trump’s other policies is advantageous tax rates on repatriated capital. And where will that cash go? Forty six per cent of US analysts think their companies will engage in share buybacks, while 19 per cent think it will fund more M&A and 12 per cent say it will mostly go towards paying down debt. None think the capital will fund higher dividend payments.

The continued focus on M&A shines through in other findings, too. Half of our analysts think there will be a moderate amount of M&A, while another 42 per cent expect M&A to be a ‘large’ focus or a ‘huge strategic priority’ for their US companies. But that’s not the only way industries are changing: the number of analysts expecting disruptive technology to have a moderate or high impact has risen significantly this year.

Source: Fidelity Analyst Survey 2018

China: revving up while rebalancing

Sentiment indicator 6.4 vs 5.7 last year

Analysts see signs this year that China’s economy has turned a corner, with management confidence across a range of indicators rising to multi-year highs.

The overall sentiment indicator rose to 6.4 from 5.7 last year, the biggest increase for any country or region in the survey. While this remains below the global average indicator of 6.6, fears that China’s economic growth could hit a wall appear to be fading. Almost nine in ten of all our analysts globally say management teams at the companies they cover are not concerned about a ‘hard landing’ in China.

For the first time in four years, expectations for new capex spending in China has turned positive - one of the sharpest turnarounds seen in the survey. Management across a wide swathe of sectors is shifting from maintenance to growth capex, reflecting the increased optimism in the world’s second largest economy and the drive to innovate and upgrade domestic value chains.

Against this bullish outlook, Chinese companies are ploughing ahead with plans to borrow to fund their expansion plans. A third of analysts - more than anywhere else - expect corporate leverage to continue to rise. This is despite the fact that companies anticipate higher costs of funding this year, according to 62 percent of China analysts. That’s much higher than for the United States, where only a quarter analysts see funding costs rising.

Despite somewhat tighter liquidity, China is benefitting as it emerges from years of deflation in industrial prices. The rebound in global commodity prices over the past year has helped - China ranks as the world’s biggest producer of a number of core commodities including copper, iron ore and aluminium. Companies are also starting to see flow-through benefits of government-led efforts at supply side reform, which have delivered targeted reductions in overcapacity across a number of major industries, such as steel.

Challenges remain. China’s rising affluence, aging population and shrinking work force have combined to push up wages. Globally, 72 per cent of respondents to the analyst survey expect wage increases for their companies, the highest such number in the past five years. China is leading the way, with 86 per cent of analysts expecting wage increases for their companies.

But while growth has been slowing in recent years, and directionally this is unlikely to change, this slowdown is expected to remain steady. Globally and in every region, a large majority of analysts expect China’s growth to remain stable.

Source: Fidelity Analyst Survey 2018

Watch a discussion between our Asia-based analysts on the key issues they are seeing for their companies. Includes:

• (00:22) Automation in industrials driving capex trends
• (00:54) Innovation in food manufacturers
• (01:42) Impact of leverage and interest rates
• (02:32) Biggest risks for different sectors

Includes contributions from: Punam Sharma, director of research, Asia equity; Peter Carter, equity analyst on industrials; Ben Li, equity analyst for consumer goods; Ke Tang, credit analyst.

Japan - Reaping the fruits of Abenomics

Sentiment indicator 7.0 vs 6.4 last year

First the bad news: despite five years of Abenomics, Japan’s wage growth remains low and inflation is still well below target.

The good news is that unemployment is at the lowest levels since the mid-1990s and corporate profits are at record highs - just a few of the many signs that the Japanese economy has improved significantly in recent years.

With a sentiment indicator of 7.0, our analysts are more bullish on Japan than any other country or region in the survey. The country’s top marks were bolstered by corporate finances that are in rude health and expectations of stable or increasingly generous dividend payouts.

Nobody tops Japan when it comes to being conservative about balance sheet management: 47 per cent of respondents said balance sheets in Japan were very safe and cautious, while an additional 20 per cent stated balance sheets were modestly cautious. Part of the credit can go to governance reforms under Prime Minister Shinzo Abe’s economic overhauls, which have helped to enhance capital efficiency and boost shareholder returns to record levels. This improvement looks set to continue: almost half of our Japan analysts predict increasing returns on capital this year.

However, expectations for wage inflation aren’t as widely shared as elsewhere. Japan ranked lowest among countries and regions in the survey with only 54 per cent of analysts seeing moderate or strong wage increases this year.

In keeping with this finding, there appears to be little sense of upward pressure on prices. Only seven per cent of Japan analysts - the lowest proportion globally - say companies are expecting to hike prices by more than the rate of consumer price inflation. And inflation in Japan remains tepid: December’s 1 per cent annualised consumer price inflation rate represented a 33-month high.

Still, moderate price increases are meaningful for Japan, as the country shows signs of shifting away from a deflationary mindset that has held sway for years.

Source: Fidelity Analyst Survey 2018

Asia Pacific, excluding China and Japan - Picking up pace

Sentiment indicator 6.2 vs 5.7 last year

Beyond Japan and China, sentiment across the rest of the Asia-Pacific region seems somewhat subdued compared with the rest of the world at 6.2 - but levels above five indicate that positive perceptions dominate negative ones. The headline finding constitutes notable sequential improvement within the region, which stretches from Australia to India, from 5.7 in the previous year.

As in China, companies in Asia-Pacific are dealing with somewhat elevated input cost inflation expectations. They also appear less bullish on dividend payouts, which only 34 percent of analysts for the region expect to increase, compared with a majority of firms in most other parts of the world (a notable exception is China, where only 29 percent of analysts see payouts rising).

The outlook for the region varies by sector. Anecdotally, the direction of regulation is expected to be a major factor for companies such as commodity producers, who experienced significant benefits over the previous year from regulations on anti-dumping or import duties, as well as from forced supply cuts.

Source: Fidelity Analyst Survey 2018

Europe: Growing optimism

European companies are back from years of cost control and consolidation. With the winds of global growth in their sails, they are making the most of ultra-cheap funding costs, growing profitability, and sound balance sheets to invest in capital and technology, and to reward shareholders.

According to our Europe analysts, company management teams are noticeably more confident about the outlook for their businesses. Just over half of analysts - double last year’s rate - say management confidence to invest in the business is up on 2017.

More than four in ten expect higher capital spending. The emphasis remains, like elsewhere, on maintenance spending but more companies are beginning to spend on growth.

Well over half of all Europe analysts expect returns on capital to increase, led by demand growth and cost savings - the rosiest view anywhere in the world. Still, it is clear that companies can ill afford to ease up on the cost discipline that carried them through two recessions in a decade. For example, cost cutting is a significantly more important contributor to expected growth in returns than in the US, and fewer analysts say pricing power will add to increased returns.

Higher returns on capital and healthy balance sheets will allow many to raise dividends further. Six out of ten Europe analysts expect an increase in payouts, a higher share than anywhere else but the US.

Most European analysts also expect a focus on M&A activity over the next 1-2 years. Deals are most likely to involve bolt-on acquisitions, rather than the large strategic deals which feature more prominently in US analysts’ expectations

Overall, Europe seems to be in good shape. Deflationary fears have subsided as the peripheral economies have picked up. Austerity is not as severe as it was, and wages are expected to rise by almost three quarters of our analysts watching the region, giving consumers a boost. (The exception is the UK, where real wage growth has been negative since early 2017, partly due to the inflationary impact of sterling’s slide after the Brexit vote.)

There are some actual and potential headwinds our analysts are keeping a close eye on. Even more than last year, Europe analysts warn Brexit is already weighing on strategic UK investment decisions. The vast majority also note that corporate profits would be vulnerable to political uncertainty or instability in Europe.

Source: Fidelity Analyst Survey 2018

UK: Brexit headwinds

The UK’s long divorce from the European Union has continued to dominate the political agenda (in Britain, at least) but our analysts seem less concerned. Three quarters of our analysts globally expect Brexit to have no impact on strategic investment plans for the companies they cover over the next two years.

However, there is a marked difference depending on where those companies are based. While 95 per cent of our analysts covering Chinese companies say they are unconcerned, for example, 54 per cent of analysts who cover Europe are expecting a moderately negative impact from Brexit, with a further nine per cent expecting a significant hit. Particularly affected are consumer discretionary, financials, industrials and materials.

Brexit is also weighing on companies’ willingness to invest in the UK, with 61 per cent of all Europe analysts warning that their companies are less willing to invest in the UK as a result of the referendum. A third of US analysts and a quarter of Japanese analysts see similar attitudes among their companies.

Looking at UK investment plans by sector, over half of analysts covering industrials think Brexit will have a moderately or significantly negative impact. Investment in consumer discretionary, financials, materials and healthcare are also expected to be hurt.

Our analysts tell us the companies they cover are fretful about the level of uncertainty around any potential UK/EU deal, the risks to London’s position as a financial hub and the associated loss of talent, as well as worries around the property market.

Inflation in Britain is expected to stay steady, with six out of ten analysts expecting UK prices to be stable over the next 12 months. Only around a quarter think inflation will accelerate, affecting industrials particularly as well as the consumer sectors, and energy.

Source: Fidelity Analyst Survey 2018

Eastern Europe, Middle East, Africa and Latin America: Plenty of bright spots

Sentiment indicator 6.5 vs 6.4 last year

Although the sentiment score has risen relatively little from last year, its score well above the mid-point level of five (above which positive responses outnumber negative ones) means corporate fundamentals continue to improve.

There are many bright spots in Eastern Europe, Middle East, Africa, and Latin America. The region is benefitting from higher commodity prices and several recent high-profile corruption cases fading from public attention in Latin America. This has resulted in optimism among companies. Two-thirds of our analysts covering these regions say management teams are ‘more confident’ while a large majority say that CEOs expect end-demand growth to drive earnings growth. This is consistent with earlier-stage growth; two thirds of our analysts believe the companies they cover are still either in early expansion or mid industry cycle. By contrast, other analysts generally say their companies are in more mature stages.

More analysts covering this region than anywhere else expect higher inflation to allow companies to raise margins. This bodes well for workers, as reflected in the relatively high share of analysts (almost a third) who expect strong wage increases this year.

But there are concerns. Balance sheets are not as safe as elsewhere; nearly a third of analysts think they are moderately stretched. The Trump administration in the US could also pose risks; 46 per cent of analysts already expect a moderately negative impact from US policies over the next two years. Additionally, fewer analysts report a rising ESG emphasis among their companies than last year, in contrast with other regions. Bribery and corruption are the top concerns.

Source: Fidelity Analyst Survey 2018