This week’s Chart Room takes a fresh look at the ongoing debate over reflation vs. disinflation, and what it could mean for corporate bottom lines. 

By extracting bottom-up, global data from Fidelity International’s most recent monthly analyst survey, we gauge the inflationary pressures facing companies across 10 key sectors - and compare this with how their pricing power has been affected by the fallout from the Covid-19 pandemic. Those sectors with a large mismatch, such as financials and consumer discretionary, could be in for a squeeze on margins.

In the October survey, Fidelity’s analysts were asked whether they expect the companies they cover to face any cost price inflationary pressures in the next six months. There is currently some disagreement between market participants about whether we are facing an inflationary or disinflationary environment, and our analysts’ responses suggest both scenarios are in play, with inflation pressures varying across sectors.

We also asked our analysts how their companies’ pricing power had been affected by the pandemic. By combining data from the two questions, we can build a picture of which sectors could face pressure on margins - and which could see their margins expand. 

Margins in the financials and consumer discretionary sectors appear most at risk of a squeeze. Firms in both sectors have seen their pricing power fall significantly since the beginning of the year. Ultra-low rates have hurt many financial companies, while lockdowns have hit many parts of the consumer discretionary sector the hardest. 

The technology sector, on the other hand, looks poised to see margins increase. Pricing power has strengthened since the beginning of the pandemic, outstripping our analysts’ views of cost inflation in the sector. Pricing power has also risen among healthcare and materials companies, not as much as inflation expectations, but it does provide an indication of where opportunities lie.

Gita Bal

Gita Bal

Global Head of Research, Fixed Income

Terry Raven

Terry Raven

Director, European Equities

George Watson

George Watson

Investment Writer

Bob Chen

Bob Chen

Investment Writer

Mark J Hamilton

Mark J Hamilton

Senior Graphic Designer