Press release

Corporate anxiety is paralysing economic recovery despite healthy balance sheets, says latest Fidelity survey.

CEOs of global companies are more concerned about government intervention and intrusive regulation than they are about inflation, wage costs, pricing issues or even their own balance sheets, according to a survey of Fidelity Worldwide Investment’s research analysts.
  • Fear of government intervention and another recession is leading companies to sit on their hands, according to a survey of Fidelity Worldwide Investment’s research analysts
  • Although balance sheets are healthier than in 2008/09, companies are reluctant to spend, hindering economic recovery

Hong Kong; 14 November 2011 – CEOs of global companies are more concerned about government intervention and intrusive regulation than they are about inflation, wage costs, pricing issues or even their own balance sheets, according to a survey of Fidelity Worldwide Investment’s research analysts.

A survey of more than 110 of Fidelity’s research analysts in Europe and Asia, conducted last month, shows that only concerns about sales volumes are causing more corporate anxiety than the likelihood of  governments enacting or changing legislation or regulation that will result in a more challenging business environment. 

As each research analyst speaks with the senior management of an average 30 listed companies at least every quarter  - a key part of Fidelity’s 'bottom-up' fundamental investment process -  the survey reflects the thoughts of thousands of CEOs and other top management at listed companies in Europe and Asia.

Matthew Sutherland, Fidelity Worldwide Investment's Head of Research - Asia Pacific, said:

"Government interference in the free market for goods and services is a perennial concern for companies. However, it is running higher than usual now due to governments' new religion of balancing budgets, which could cause them to seek revenue opportunities through new tax schemes.

"Also, a world of competitive currency devaluations potentially leads to trade wars, quotas, tariffs and other destabilising influences. 

"Additionally, governments such as China's are increasing their tendency to micro manage business in order to achieve macro goals, particularly in the banking, property and environmental areas.

"Despite this, it is clear that if we can get some strong leadership from politicians and more confidence that the sovereign debt crisis in Europe can be brought under control, the corporate world is in good shape to fuel an economic recovery."

The survey has found that the crisis of confidence within senior corporate ranks is not just a theoretical issue; it is causing corporates around the world to resist increasing their spending despite the recovery in their balance sheets compared with 2008/09.

Regulatory risk /government intervention are most feared in the Healthcare and Utilities sectors, even more so than by bank CEOs.

Mr Sutherland said:

"The balance sheet improvement isn't filling corporates with confidence – they are keeping their hands in their pockets. C
ash-rich companies in Asia ex-Japan alone are sitting on around US$1 trillion in cash. At the moment most seems to be going the way of dividends - cash payout ratios are set to increase from 12% in 1998 to 32% in the next year.

Olivier Szwarcberg, Head of Credit and Structured Research – Europe, said:

"The balance sheets of both Asian and European companies are considerably healthier than in 08/09 but CEOs are reluctant to spend their cash-flows as political and economic uncertainty continues.

"In fact, in
88% of cases, Fidelity's research analysts believe that the companies they cover have stronger balance sheets than in 2008/2009, indicating that important lessons were learnt in the last financial crisis.

"Such relatively healthy balance sheet fundamentals are out of line with corporate debt valuations, with credit markets effectively pricing in outright recessionary fundamentals."

Henk-Jan Rikkerink, Head of Research – Europe, said:

"According to the survey results, most global corporates are planning on reducing or keeping constant their capital expenditure [71%], freezing spending growth in IT and marketing [68% and 62% respectively], and keeping employment levels constant [only 29% intend to actively recruit].

"Clearly there is a lack of conviction amongst CEOs that governments will leave them alone or that a global recovery is underway, and recent events have proven them right to be cautious on both fronts.
Healthcare and utilities companies, in particular, fear intervention. The former have been hit in recent weeks by government restraints regarding reimbursement, for example, while utilities have been hit by tax increases.

"A dose of corporate Prozac, as well as clearer outcomes from our governments, are required to kick-start the corporate spending which could help spark a global economic recovery."

Digging a little deeper into the survey results, there are regional differences. In Asia Pacific, Fidelity's analysts believe that 32% of companies are looking to increase their capex by 10% or more in the coming year compared with last year, with 9% looking to increase their spend by over 20%. In Europe, only 21% of companies are looking to increase their capex by 10% or more in the coming year compared with last year, with 5% of companies  looking to increase their spend by over 20%.

Mr Rikkerink said:

"While the gap between Asian and European capex expenditure may not look significant at first glance, it is important to remember that European companies are starting from a much lower base than their Asian counterparts as capex spend in Europe has been extremely low for two to three years now. What this does mean, however, is that when companies feel confident enough to loosen their purse strings, the reversal back to the norm will look like an explosion of activity."

In addition, the majority of companies in Asia and Europe are not interested in M&A activity as a strategic option.

nvestment bankers be warned – our analysts expect companies to stick to their knitting over the next year. They believe that approximately 84% of companies have either dismissed M&A entirely to drive growth or are only considering it on a small scale.

While at first this may seem surprising, the results are consistent with other evidence suggesting an end to the excessive M&A era: lower returns from private equity funds, less successful IPOs, higher capital requirements from banks to name a few. Companies just don’t want to take a risk with their balance sheets at this time. The small amount of M&A activity we are likely to see should come from the Technology, Telecoms and Media sectors, and this should be in the form of small 'bolt-on' acquisitions rather than mega deals," Mr Rikkerink said.

Short-term funding could still be a problem

A reason for the reluctance to spend out of cash-flows may be the reliance on short-term funding. While Fidelity’s fixed income analysts are fairly confident that the majority of companies could ride out a short-term dislocation in capital markets, the survey found that approximately a third [31%] of cases, analysts believe some companies may not, being reliant, very reliant or entirely reliant on short-term financing.

Should there be a major dislocation in capital markets, 6% have no other sources of funding and 27% have only one other source of funding, or it is likely to be expensive. Asian companies, financials and utilities companies in particular believe they would have to pay a high price. In contrast, healthcare companies seem to have the most choice when it comes to alternative sources of funding.

Mr Szwarcberg said:

"One of the things we put more importance on now is the ability of companies to fund their activities and growth. This is not a simple task, requiring in-depth research and understanding, but it can be the difference between one company surviving a credit crunch and another not."

– Ends –

About Fidelity Worldwide Investment

Fidelity Worldwide Investment is a global leader 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 5,000 staff in 24 locations and manages or administers client assets of US$257.3bn as at 30 September 2011. It has over 7 million customer holdings and manages more than 740 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.


About the survey

114 analysts (90% of Fidelity’s analysts across Europe and Asia) responded to the survey in the period 3rd to 12th October 2011. The regional split of analysts was 58 from Europe and 56 from Asia (inc Japan).


Fidelity's analysts

Fidelity's research analysts complete research on 90% of the world's largest listed companies every 90 days (based on FIL Limited coverage of the MSCI World Index as at 31 July 2011). Contact with analysed companies' CEOs, CFOs and divisional managers of companies are crucial in Fidelity's research. In Europe, on average the research team has 27 meetings with analysed companies a day, equating to more than 5000 each year. In Asia, securities in 13 different countries are analysed from seven different offices and two support locations across six time zones.


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