Fidelity has over 160 analysts covering companies’ bonds and shares around the world. These industry experts offer investors a unique view of the world, from the bottom up, via the Fidelity Analyst Survey, which is now released monthly. The Survey provides qualitative data that allows us to identify emerging trends ahead of other investors and apply this knowledge within investment markets.
Findings of the Fidelity Analyst Survey
Ned Salter - Head of Equities, Global Research and Asia ex-Japan Investment
To date, stimulus measures have helped support economies through COVID-19. Management sentiment is expected to continue to slowly improve in the coming months. However, the situation has only improved from “generationally disastrous” to “quite bad”.
There have been improvements both in economic and investor sentiment as economies have reopened around the world. However, the rate of improvement differs by sector; some were worse affected by COVID-19 (energy, retail, industrials) and these are lagging in the recovery, particularly behind technology which has benefitted in many areas.
Geographically, we are also seeing dispersion in outcomes. China appears to be leading the recovery, experiencing a first-in-first-out situation and being helped by its application of draconian lockdown measures. Other countries are also showing varied progress. Some developed economies are reopening slowly, while others are seeing second waves develop, most notably the US. There has also been a dispersion in how successful countries have been in handling the virus; for example, Japan remains in its first wave but has so far seen a very limited rate of infection relative to Western nations.
Furlough programmes are now ending and it remains to be seen what further stimulus will be provided. There is a focus on how much unemployment / wage cuts will be permanent. Workforce changes are likely to be more persistent in sectors that are directly affected by social distancing measures (for example, consumer discretionary) and those that are indirectly affected (industrials).
A derivative of this is the growing emphasis on the Social factors within ESG considerations. The Survey shows that corporate behaviour is shifting to better account for such issues, although to different extents across various sectors and geographies. ‘Resilience’ has become a buzzword This might mean operating over periods of reduced profitability in order to fulfil the common good. An example being server farms having to invest more to increase their resilience and provide more robust online services to individuals isolating due to the pandemic; this would mean higher investment, higher cost and therefore lower profitability.
There is also an increased emphasis on sustainability; sustainable companies are now seen as more likely to become long-term winners amid more discerning consumption patterns and greater attention from regulators.
How reliable is the Fidelity Analyst Survey in judging earnings or growth?
Surveys are particularly useful for identifying trends and judging turning points. For example, we saw China emerging from the crisis before this was appreciated by the broader market and were able to extrapolate this trend. However, survey data can not be considered in isolation; if we had extrapolated the initial post-lockdown improvement in sentiment in the US without considering the risk of a second wave, we would have lost out.
How does Fidelity account for ESG issues?
Our analysts rate companies on a range of ESG criteria. The criteria change by sector and ESG considerations are considered as relative within each sector. Otherwise, ESG portfolios would simply include media companies; energy and industrials would be automatically excluded because of the nature of these businesses, although society still needs their products.
We are not there yet, but society will probably begin to demand an absolute level of ESG consideration across sectors eventually, rather than a relative approach. Currently, the best approach is to try and facilitate improvement from companies on ESG issues. This means investing across sectors, helping companies that are striving to become more sustainable, even if they are not there yet. For example, within energy this might mean considering which companies are producing oil relatively cleanly and which are most damaging to the environment. We accomplish this largely through corporate engagement.
Are markets penalising companies that are not acting sustainably?
Our research indicates that there has been a divergence in performance between companies that account for ESG issues (outperforming) and those that do not (underperforming). This was exacerbated by the COVID-19 crisis. ESG factors are natural fundamental factors that affect businesses and ESG winners are going to deliver higher cashflows through cycle. We believe this will allow them to command higher valuations (they may also benefit from strong investment flows into ESG products).
We would look to support companies that are not being acknowledged for their ESG practices, as this is a way to generate alpha. However, the other side of this is that fashionable companies in the ESG space might see their valuations rise significantly, creating a situation whereby investors are penalised for investing in these companies. In this manner, ESG considerations might come to affect change on the current asset valuation paradigm.
What are the implications for companies of better resilience?
Sumant Wahi - US and tech analyst, portfolio manager
Within the technology sector, companies will be expected to cope with peak usage. Many businesses consider this as essential already, but as usage becomes greater and more consistent it will be important for businesses to be able to maintain their output. There could be a shift in demand and pricing from ‘cheapest’ to ‘most reliable’. Companies will have to focus more on the robustness of their online offerings as their use increases; one aspect of this is that episodes of hacking are highly publicised and can be very damaging for companies (for example, the latest Twitter hack of numerous public figures).
Casey McLean - Asia analyst and co-portfolio manager
In recent years, the resilience of Asian technology companies has already been tested by various trends, including higher wage costs and the US-China trade war. These companies have generally been successful in overcoming these challenges, expanding their cashflow generation capabilities via focuses on innovation and costs (e.g. via lights-out factories, which can run with little human presence - ideal through COVID-19). Now, many Asian technology companies are in market-leading positions globally: Chinese smartphone brands are dominating total unit sales, Lenovo has become the volume leader in laptops, Mediatek is competing head-to-head with Qualcomm. Much of this has been enabled by the position of Taiwan Semiconductor Manufacturing Company (TSMC) as the lynchpin of the semiconductor production (foundry) industry, as well as focuses on software development, early adoption of artificial intelligence, etc.
What are the ethical conflicts that arise in technology companies?
The main issues are in privacy and the dissemination of misinformation. Big tech knows the spotlight is on them regarding these issues. Mega-cap companies like Facebook and Google know that they wrap around SMEs and they have striven to provide support to their smaller partners through the crisis. Amazon does the same and its market penetration has obviously jumped as it has provided its services to individuals through the crisis, throwing greater spotlight on its practices.
Large tech companies are generally performing well in terms of digital ethics. Some businesses (like Twitter) are striving to be proactively ethical beyond what is required by law. Others, like Amazon have put exceptional focus on employee safety, investing huge amounts to ensure this through COVID-19, as they should. Google is doing the same; it has many advisers, including politicians, and it strives to stay on the positive side of future legislation, not simply to just to keep in line with current requirements. This is particularly important for developing industries that have wide-ranging implications, such as artificial intelligence.
Despite these facts, certain laypersons will always view big tech with suspicion. These companies are involved in so many businesses and areas of society that there will always be a journalist or news story questioning their behaviour or abilities.
Is there a difference in the ethical approach of Asian companies?
To an extent, Chinese big tech businesses such as Tencent and Alibaba are operating in similar ways. However, there is less regulatory pressure in China, in terms of the liberalisation of data use. In China, consumers are more willing and prepared to give up their privacy for low costs / convenience and there is greater access to personal data as a result. China is now beginning to export its internet culture to the West. This might not be evident to older people, but it will certainly be familiar to Western youth. Regulators will start to increase their focus as a result and it could cause some Asian businesses to split into separate entities.
Chief executives of the big US technology companies are appearing before a congressional antitrust hearing. What are the implications?
The background is that US regulators and the Department of Justice are frustrated with how US laws regulate the big tech companies. Currently, big tech companies can protect and exploit their monopolies in the US (Google with its services, Apple with its apps). There is no passage to complain as there is in the EU, where regulators can assess the actions of the big tech companies and fine them if they are judged inappropriate. The EU’s regulations have become more advanced in terms of data protection and anti-trust; for example, with the introduction of GDPR.
The hearing will investigate whether current laws are sufficient, or if they should be increased or enhanced. The focus will be on whether big tech companies’ activities are providing benefits or threats to society. Eventually, it is likely there will be greater regulation of these companies, if only because they are involved in so many aspects of society.
What effect could the US Presidential Election have?
There has been a huge focus on the spread of misinformation and fake news, be this political (Russia or other foreign involvement in elections) or in relation to COVID-19. Regulators are likely to want to hold big tech companies with platforms to become more liable for the content they disseminate. The problem is, different politicians have different views and determining who is right is can be difficult. Silicon Valley has been considered as primarily democratic in its political leaning in the past. In any case, there is a bipartisan desire to have big tech regulated more closely; how this regulation is formed is yet to be determined.
Trump is unlikely to soften his rhetoric towards China and although democratic policies may be less impulsive (perhaps with tariffs rolled back), the direction of the policy war is unlikely to change. The US and China will remain in a battle for global dominance, therefore protectionism and localisation are likely to continue. This will present big challenges for Asian technology companies. For example, everyone has seen how Western governments have responded to Huawei’s presence in their communication networks and supply chains and the semiconductor industry is particularly vulnerable to such action. Chinese businesses might be delisted from US exchanges, while China has established the STAR market to list innovative technology companies, with the longer-term goal of challenging the US’s NASDAQ. STAR has performed well since its foundation.
Covid-19 has accelerated technology and communication trends. How should investors respond?
The drivers of big tech growth have been sustained and even accelerated through the pandemic. Given increased dependency of society on these businesses, there will be more focus on how they are acting and whether they are benefitting society.
Some companies have been beating financial expectations and giving strong guidance as a result of extrapolation of recent trends, such as working from home. We believe these trends may be more incremental in the longer term. As a result, we see risk that share prices have performed too strongly and that some valuations might have run too far.
We also expect debate about the direct and second order effects of the election to increase in the coming months, which could lead to higher market volatility.
We are still positive on big tech and other companies that have benefitted from increased adoption. With ecommerce activity having increased sharply we see more upside for Amazon. It is important to be selective; for example, Spotify’s valuation has gone through the roof - we believe too far.