Hong Kong, 12 May 2014: Corporate confidence and fundamentals favour developed over emerging markets, with the US widely regarded as the standout economy, according to Fidelity Analyst Survey.
The survey of 128 Fidelity analysts based in Europe and Asia, also 43% of the companies they covered are more confident or a lot more confident about the year ahead compared to last year, reflecting the strength of the recovery, a return to ‘fundamentals’ after a period of protracted uncertainty and management caution. Analysts covering developed markets are more confident than analysts covering emerging markets, and analysts covering financial, industrial and consumer discretionary stocks are the most confident about management investing in their businesses.
The survey also found that company management are expected to maintain (43%) or moderately increase (36%) their capex plans. As a result of this cautious optimism, companies are starting to spend some of the cash sitting on balance sheets with the focus on shareholder-friendly activity, bolt-on M&A and increases in dividend payments rather than aggressive capital expenditure (capex) growth. There was a more positive response in the US and Europe relative to Asia, reflecting some of the current headwinds facing the region’s emerging economies amid QE tapering. However, Japan is the only place where companies are expected to put their capex focus heavily on growth.
Commenting on the findings of Fidelity’s latest Analyst Survey, Leon Tucker, Head of Equity Research, Asia Pacific at Fidelity Worldwide Investment, said: “This year’s survey suggests company management teams are more confident in their businesses and put their focus back to capital allocation. We expect market leadership to refocus on quality franchises, particularly those in the intellectual property sectors, such as pharmaceuticals and technology.
“We believe that the equity market will revert to rewarding the best allocators of capital that creates shareholder value. Instead of risk-on, risk-off sentiment caused by macro-economic factors, fundamental stock-specific drivers are likely to explain a larger part of investment returns. Bottom-up research process is critical to identify long-term winners with strong fundamentals in today’s environment.”
From a fixed income perspective, the credit cycle is maturing as leverage creeps higher and valuations tighten. Event risk will be the dominant theme for credit investors over the next 12 months, which creates both winners and losers in the bond market.
Gregor Carle, Investment Director, Fixed Income at Fidelity Worldwide Investment, said: “Although there is a deteriorating of balance sheet fundamentals, only 26% of our analyst surveyed reported balance sheets as being stretched, In our survey, China comes out as a key geography in terms of having weaker balance sheets, consistent with reported signs of credit expansion in the economy. However, we don’t think a credit crisis will happen in China given the strong liquidity support from the government.”
The Fidelity Analyst Survey is run annually and presents a temperature check of corporate confidence and identifies some of the long-term investment themes expected to shape the global economy and investment markets in the years ahead. The survey garnered responses from 128 analysts based in Europe and Asia and provides a rare insight into Fidelity’s fundamental investment process.
A summary of some of the key findings can be found below:
A return to fundamentals
After an extended period of uncertainty and corporate caution, management confidence and animal spirits are returning to economies and stock markets. Management teams are now no longer worried the world will end; the big tail risks of financial system collapse or contagion have become progressively less likely. Capex is expected to recover from historically low levels, although the magnitude and pace looks likely to be more muted than the consensus belief. Two of the largest historic contributors to capex in absolute terms have been energy and materials, yet these sectors produced the highest negative results in the survey. Healthcare and consumer discretionary, on the other hand, were the sectors which led the way in terms of analyst expectations of capex increases.
A preference for developed markets with the US widely regarded as the standout economy
In terms of geographies, the survey produced a marked divide between developed and emerging markets. This is unsurprising, given the current environment of a stronger dollar and fall-off in commodities demand. The US came out strongest in terms of business confidence, capex outlook, dividend growth potential and balance sheet health. In terms of sectors, a related divide was also prominent; the sectors that polled more positively across the board were the knowledge economy sectors of pharmaceuticals, technology and financials, as well as consumer.
In Asia, Japan leads the way in terms of return on capital growth expectations, with Abenomics reforms expected to exert a positive influence on company management teams and increase returns on capital rates. China is still a robust story, moving to a structural reform and domestic consumption narrative from an export growth play.
From a fixed income perspective, Asia portrayed weaker credit fundamentals versus developed counter-parts, yet Asian valuations were recognised as providing ample compensation for the risks.
A focus on shareholder-friendly activities
One of the strongest responses in the survey was around dividends, with analysts reporting that a large majority of their companies are likely to maintain (54%) or increase (40%) dividends. Perhaps unsurprisingly, financials (post the 2008/9 financial crisis) and healthcare companies were most bullish about dividend increases. Japan and the US were the regions that were most expected to increase pay-outs, although this may be partly a function of the fact that the total dividend level is lower in these markets than is traditionally the case in the UK and Europe so there is more scope for dividends to grow in these geographies. The survey also revealed 85% of analysts believe M&A will be a priority looking ahead. Most analysts expect a moderate amount of M&A, 15% a large amount, and only a small minority see M&A as a huge strategic priority. A high degree of activity is expected in China, however, possibly signalling that a period of consolidation is coming to many of the fast-growth sectors of the past decade.
Notes to editors:
About Fidelity Worldwide Investment
Fidelity Worldwide Investment is one of the global leaders in asset management, providing investment products and services to individuals and institutions in the UK, continental Europe, the Middle East and Asia Pacific. Established in 1969, the company has over 6,500 staff in 24 countries and manages or administers client assets of US$350.2 billion. It has over five million customer holdings and manages more than 700 equity, fixed income, property and asset allocation funds. The company’s fund managers receive research from one of the largest proprietary research teams, based in 12 countries around the world. Fidelity Worldwide Investment is an independent asset management company which is privately owned.
Data as at 31 March 2014
About Fidelity Analyst Survey
This report presents a snapshot of some of the key investment opportunities identified by Fidelity’s equity and fixed income investment teams across Europe and the Asia Pacific regions. Drawing on this fundamental company research, Fidelity’s analysts highlight some of the broader investment themes that will shape the global economy in the years ahead. The survey is not exhaustive by any means; rather it is designed to shine a light on some of the companies, sectors, regions, and secular themes that Fidelity believes are the most attractive against a backdrop of deleveraging and weak global growth.
This report is based on questions given to more than 128 equity and fixed income professionals in Europe and Asia covering a variety of sectors, designed to extract a selection of their best and most contrarian investment ideas. It was complemented by a number of discussions with heads of research to verify trends and themes across countries, sectors and asset classes
About Fidelity’s fundamental research-driven approach
Fidelity pursues an active investment style based on the deep and comprehensive fundamental research undertaken by our investment teams. Its objective is to deliver superior investment performance by developing a rich and detailed understanding of the anticipated financial evolution of all of the companies in which it invests. Its global research network comprises over 350 investment professionals, based in a range of international locations, including London, Paris, Frankfurt, Milan, Mumbai, Singapore, Hong Kong, Shanghai, Seoul, Sydney, Tokyo, Sao Paulo and Bermuda.
Its portfolio managers are supported by a broad, dedicated team of investment analysts who cover specific sectors and markets. The analysts are responsible for maintaining investment recommendations based on fundamental, proprietary research. Fidelity does not impose top-down investment views on its portfolio managers, who are responsible for their own investment decisions. At the same time, they have access to extensive macro-economic analysis and market cycle insight to inform portfolio construction.
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