Concerns over the length of the business cycle and geopolitical events helped to drag sentiment down to its lowest level since 2016 even before the coronavirus epidemic began, according to Fidelity International’s 2020 Analyst Survey.
The survey’s Sentiment Indicator– an aggregate measure of the outlook for corporate fundamentals– gauged the views of 151 analysts at Fidelity making assessments based on 15,000 company meetings.
As such, the analysts forecast a small expansion in overall corporate activity of 0.2, representing the latest fall since sentiment peaked in 2018. However, unlike 2016, sentiment remains in expansion territory.
Last year, the analysts correctly predicted an end to synchronised growth and no recession, the asset manager said.
Fidelity Sentiment Indicator 2016-2020
Source: Fidelity International
Taken in December, this drop in management confidence seen by the Fidelity analysts was largely attributed to late-cycle caution and geopolitical uncertainty.
Despite softer sentiment, however, Fidelity analyst report that a smaller percentage of companies are preparing for the cycle to end (36 per cent) compared with 2019 (49 per cent).
Indeed, most analysts reported that the companies they cover expect the cycle to be in recovery or mid-cycle expansion in 12 months’ time.
“Recession again appears to have been postponed, at least until 2021, thanks to low interest rates, recovering global trade and a still-strong consumer,” the asset manager noted.
In addition, more analysts believe companies are preparing to increase headcounts – across all regions and sectors – rising from 25 per cent last year to 38 per cent in 2020.
The survey also found that ESG (environmental, social & governance) issues are becoming more important in companies’ thinking.
Indeed, Fidelity labelled it a “watershed year” for ESG with more than 90 per cent of analysts reporting that some companies or all of the companies they cover are focusing more on the issues, across all regions and sectors.
On a regional level, the sentiment indicator has fallen back to a more neutral position “with analysts reporting that companies are neither bursting with optimism nor bracing for the worst”.
“As the cycle extends beyond historical norms, it is becoming harder to determine exactly where things will go next,” the firm noted.
Fidelity Sentiment Indicator – Regions (2016-2020)
Source: Fidelity International
While it was the most improved region in terms of sentiment, analysts were most bearish on China with a score if -0.4, particularly on the back of an economic slowdown and a trade war with the US that could still impact the economy.
“The components of the Sentiment indicator for China are almost universally decelerating,” the firm noted. “Return on capital looks particularly bad, with over half of analysts expecting it to decline in 2020. A slightly lower proportion also think capital spending will fall.”
Analysts were most bullish about the prospects for the emerging Europe, Africa and Latin America region, which once again scored the highest sentiment.
“Market demand is the reason,” the report noted. “Half of our analysts in these regions report that chief executives expect end demand growth to fuel earnings growth.
“Not one of those chief executives appears less confident than last year, which could explain why only 14 per cent of analysts think investment will be lower this year than in 2019.
“Overwhelmingly, analysts think this investment will be directed towards growth rather than maintenance projects.”
On a sector level, analysts were most positive on healthcare for the second year running, Management teams in the sector are more confident about the year ahead and capital expenditure is expected to increase. While it faces challenges from disruption and regulation, the firm’s analysts believe that it will be able to adapt and thrive.
Fidelity Sentiment Indicator – Sectors (2016-2020)
Source: Fidelity International
Analysts were most bearish about the materials sector, which scored -0.9 on the sentiment indicator down from 0.3 in 2019.
“Global economic activity slowed in 2019, trade declined sharply, and commodity prices spent the year treading water, causing management teams to reset expectations,” the asset manager said. “And given we asked our analysts before the coronavirus outbreak, which looks set to impact all of the above, it is likely the outlook has deteriorated since then.”
The Wuhan coronavirus is Fidelity’s ‘grey swan’ – “not exactly a black swan for international companies and markets” – that wasn’t known about at the time of the survey.
“The spread of the coronavirus, and the extent to which it will affect the global economy, is almost impossible to predict,” said the firm.
“Instead, the survey works as a tool for forecasting patterns in corporate fundamentals, and for determining the cyclical and structural trends that will shape businesses over the following 12 months. And, in this regard, it has proven to be accurate in the past.”
Last year, Fidelity’s analysts forecast that corporate profit growth would slow after “bumper years” of 2017 and 2018.
“And indeed, 2019 turned out to be a year of fairly flat earnings growth for companies globally,” the firm added. “However, the survey is concerned with corporate fundamentals, rather than valuations, and the equity market rallied strongly after the US Federal Reserve lowered interest rates at the start of the year.”