The survey avoids broad macroeconomic overviews and ruminations on valuations in favour of granular insight into the corporate fundamentals that drive business performance, built from the bottom up. Our analysts cover over 80 per cent of global market capitalisation and the results provide a country- and region-specific barometer of company managements’ hopes and fears for the coming year. Are they excited about growth prospects? What are their spending plans? What do they expect from input costs and inflation? Are they more worried about the impact of geopolitical events this year than last?
Our analysts have one focus - to determine the best companies to own in a portfolio. To do that they develop a deep understanding of the companies and sectors they cover. What makes the survey so powerful is the patterns that emerge from the aggregation of these expert opinions. The trends that emerge in the data are used by our analysts to inform their future decision making to recommend companies that benefit from the tailwinds or are less exposed to the headwinds.
This year the survey features the highest ever number of responses as for the first time we include our analysts based in Canada, giving us a view of North America from closer to the action.
Recent track record
When we conducted our survey at the beginning of 2016, we noted a precarious outlook. Markets were jittery and threats and opportunities appeared finely balanced. Based on the survey responses, we were reasonably confident the world economy would avoid sliding into recession, but it seemed a close call. In the year that followed, concerns about the health of the Chinese economy and US rate hikes abated and fears of a recession gradually faded. Even though the global economy only returned to a firmer growth track in the second half of the year, when the oil price had recovered convincingly and the pressure on energy and materials firms started to ease, hindsight would probably say our survey overestimated the risks in play at the time.
By the beginning of 2017, our analysts signalled a much more optimistic outlook for the year ahead. We expected modest demand growth and continued innovation would drive investment and corporate activity. We noted executives appeared unfazed by recent political upsets and were expecting market dynamics to be favourable. So it proved to be, as capex, sales and earnings all improved markedly around the world during the year.
The survey responses that year also suggested a bottoming out of the capex cycle might be near after two years of declining investment. Company data from that period shows that capex did indeed start to pick up in 2017. But, if anything our analysts were too cautious as capital spending continued to increase throughout the year. Fiscal stimulus in China and expectations of pro-business policies from the Trump administration provided further support for corporates as equity markets repeatedly made new highs and credit spreads contracted globally as investors scrambled to adjust their outlook.
Global aggregate of companies that Fidelity International analysts cover. All figures converted to USD. Forecasts are those of Fidelity analysts. Source: Fidelity Analyst Survey 2019.
At the start of last year, the survey responses pointed to stronger fundamentals across all regions and sectors in the coming 12 months. Corporate sentiment was at a five-year high and the subsequent data for 2018 has largely backed this up. Earnings, sales, capex and free cash flow were all higher in 2018 than 2017. However, while the direction of travel was most definitely called correctly, the full-year results have not quite lived up to the high expectations of our analysts, and as the year progressed corporate fundamentals softened from the peaks seen in early 2018.
Despite the lofty sentiment indicator, our analysts noted that the market cycle was in its latter stages, summed up by our choice of title, ‘As good as it gets’. In the end this proved remarkably accurate - the first quarter of 2018 turned out to be as good as it got for corporate fundamentals.
The survey data last year also pointed to upward pressure on wages and costs but not prices, contrary to consensus at a time when many were worrying about upside inflation risks. Again, events in the past year have proven our analysts’ expectations largely correct - rising employment levels and wages have not fed into inflationary pressure and, with the global economy cooling as we begin 2019, the US Federal Reserve looks set to pause from its hiking cycle with fears now turning to the possibility of deflationary risks.
The survey identifies broad market trends but from the opposite direction to most macro analysis - from the bottom up. The sheer number of our dedicated analysts and the scope of our market coverage make the findings unique and the conclusions robust. Looking at the world from many different angles can only be a good thing.