FIDELITY
ANALYST
SURVEY
2015
A MICRO VIEW
ON
MACRO
DIVERGENCE
0
10
1
2
3
4
5
6
7
8
9
7.1
5.3
4.3
4.4
5.6
5.8
LATIN AMERICA/EMEA
Mixed outlook makes discrimination critical
CHINA
Growth is slowing, but from a rapid paceASIA PACIFIC
(EX JAPAN & CHINA) Reform will be
the focus
US
Recovery is maturing, still looking strong
EUROPE
Moving into recovery with strong
corporate renewal
JAPAN
‘Abenomics’ is boosting confidence and expected returns
REGIONAL VIEW
GLOBAL SENTIMENT SCORE
2015 – 5.7
2014 – 6.4
DEVELOPED STILL
BEATS EMERGING…
The survey’s surprising top-performer is Japan as ‘Abenomics’ encourages optimism from a low base, followed by Europe
where analysts are positive about corporate renewal, and the US where the recovery is maturing. Caution resonates for China, while emerging markets are
facing general softness, meaning reform progress will be a key
differentiator.
17,000
Fidelity analysts conduct company meetings per year1
10
meeting every
minutes
Global sentiment score is a composite of the 5 key indicators detailed below
10
9
8
7
6
5
4
3
2
1
0
0
10
1
2
3
4
5
6
7
8
9
Fidelity Analyst Survey 2015 3
SECTOR VIEW
ENERGY CONSUMER
DISCRETIONARY CONSUMER STAPLES TELECOMS FINANCIALS
MATERIALS UTILITIES IT INDUSTRIALS HEALTHCARE
Fidelity Composite Sentiment Indicator Our overall sentiment scores are based on an aggregate of five key indicators that capture the overall analyst view on the companies within their sectors. The responses are weighted on a scale of 1-10 (with 10 the most positive) and aggregated on the basis of the market cap of the relevant sector. The result is an indicator that is best used as a comparative tool rather than an absolute value.
CAPEX MANAGEMENT CONFIDENCE BALANCE SHEET STRENGTH DIVIDEND POLICY
KEY INDICATORS: COMP. 2015 SCORE
GLOBAL SENTIMENT SCORE
5.7
Global sentiment score is a composite of the 5 key indicators detailed below
UTILITIES
Considerable balance sheet repairs, but coal and gas prices a risk
ENERGY
Loses out in all areas from the lower oil price
SECTOR FUNDAMENTALS
MOVING APART
Survey responses were considerably more diverse than last year, but dividend expectations remain supportive
for all regions and sectors except energy.
INDUSTRY RETURNS
10
9
8
7
6
5
4
3
2
1
0
2.1
3.8
5.0
5.6
5.9
6.2
6.2
6.4
6.4
6.8
IT
High levels of disruption make stockselection critical
HEALTHCARE
Comes out on top, driven by innovation and supported
by structural factors
STAPLES
Much loved by investors seeking a stable income
EXECUTIVE SUMMARY
A report with a difference 6
Increasing regional divergence 7 While energy stocks stumble over lower
oil prices, other sectors show robust potential 7 The era of cheap funding continues 8
It pays to be selective 8
1. DEVELOPED MARKETS MORE
PROMISING THAN EMERGING MARKETS
The US recovery is maturing,
but the outlook remains supportive 11 Corporate renewal in Europe in
anticipation of demand recovery 13 Japan: ‘Abenomics’ gets the benefit of the doubt 15 China: Caution amid the slowdown 17 Emerging markets: Overall concerns mask diverging fates 18
2. DIVERGING OPPORTUNITIES ARE PUSHING SECTORS APART
Sector winners capitalise on
cheap funding and low cost pressures 22 Oil prices: A story of winners and losers 22 Healthcare: Innovation and new drugs driving confidence 24 Telecoms: Confidence to drive M&A 25 Consumer sectors: Oil prices supportive
in a competitive climate, but staples upside limited 26 Considerable balance sheet repairs in utilities,
but oil and gas prices creating new risk 27 IT: A tale of disruption and dispersion 28
3. INCOME: CHEAP FUNDING FOR LONGER,
HEALTHY DIVIDEND OUTLOOK
Lower for longer 30
4. WHAT ARE THE RISKS?
325. IS THERE WISDOM IN CROWDS?
Last year’s predictions proved accurate 34 Demonstrable added-value in our analyst opinions 34
APPENDIX 1:
The results in full 37
APPENDIX 2:
CONTENTS
Fidelity Analyst Survey 2015 5
We surveyed 159 of our equity and credit
analysts to find out the prospects for their
sectors in a world shaken by unprecedented
monetary measures, significantly lower oil
prices and substantial currency realignments.
The results are revealing.
EXECUTIVE
SUMMARY
122 RESPONSES
(EQUITY)
37 RESPONSES
(FIXED INCOME)
17,000 MEETINGS
HELD EVERY YEAR
1 MEETING EVERY
10 MINUTES
A REPORT WITH A DIFFERENCE
Once a year, we ask all our equity and credit analysts a range of detailed questions about their sectors and aggregate the results to detect changing circumstances early, identify new trends and highlight attractive investment opportunities. The result is a temperature check on geographies and sectors that is rare among investment surveys for being built entirely from the bottom up.
This is not a macroeconomic overview of corporate conditions, based on widely available, publicly released data and official indicators. Rather it is an aggregate measure of sentiment based on a wealth of proprietary analysis and company meetings – a pixelated image, made up of 17,000 company interviews and countless
What are these conversations telling us? Over and above a wide range of industry and geographic insights, one word comes to the fore as a central theme: divergence. The red thread through the survey this year, which was conducted in January, is growing differentiation between regions, between sectors and even within regions and sectors, reflected in a much wider dispersion of responses compared to our 2014 survey.
Our report sets out how this growing differentiation is evident at a regional level (part 1) as well as at the sector level (part 2). It examines the consequences for income strategies – not just fixed income but equity income as well (part 3). We look at the main risks
“ JAPAN TOPS OUR COMPOSITE CONFIDENCE RANKING,
FOLLOWED BY EUROPE, WHILE US CONDITIONS ARE
PREDICTED TO REMAIN BROADLY STABLE AT HEALTHY
LEVELS. OUR ANALYSTS ARE REPORTING A WORLD
OF GROWING DIVERGENCE, IN WHICH DISCRIMINATION
WILL BE CRUCIAL.”
Fidelity Analyst Survey 2015 7
INCREASING REGIONAL DIVERGENCE
Overall, our analysts favour company fundamentals in developed markets over emerging markets, partly based on the view that the US recovery, although maturing, still has some way to run. While management confidence in the US was seen to be rising last year, it now appears to have stabilised and capex plans are easing, while demand is the top-listed driver for growth and analysts remain optimistic about dividend forecasts. While the US recovery is levelling off, the European recovery is predicted to gather steam on corporate renewal and recovering demand. Interesting splits in responses indicate that some sectors (such as energy and materials) are still suffering in contrast to others (like healthcare) that are faring much better. Benign wage and cost price inflation, low energy prices and a conducive FX environment are supporting the corporate outlook and demand growth is now seen as an important source of earnings growth. As a result, analysts are generally optimistic about dividends and expect a rising return on capital.
Somewhat surprisingly however, Japan tops our aggregated sentiment indicator, ahead of Europe and the US. ‘Abenomics’ is seen feeding through in stronger management confidence and capex plans and, crucially, wage growth is expected to come through, while the outlook for dividends is excellent. At the other end of the scale, the results for China show caution resonating across the survey. Our analysts report that demand indicators are softening and cost-cutting is now a common driver of earnings growth. Rising competitive pressures are evident in many of the survey’s indicators. In fact, the survey reveals general softness across all emerging markets; however, this masks considerable divergence within this category as lower oil prices and differing reform commitments create well-defined winners and losers.
WHILE ENERGY STOCKS STUMBLE OVER LOWER
OIL PRICES, OTHER SECTORS SHOW ROBUST POTENTIAL
Energy and materials are clearly hard hit by lower oil prices, but when these sectors are excluded from the results, the picture looks considerably stronger. Even within energy, oil exploration & production and oil equipment are much harder hit than other parts of the sector. Equally in utilities, European companies are suffering from lower gas and coal prices as well as continuing overcapacity, but overall the sector has seen significant balance sheet repairs allowing companies to pay dividends out of cash for the first time in several years.
At the other end of the scale, healthcare comes out at, or near, the top of all categories in the survey, indicating a continuing healthy outlook. IT also scores relatively highly with decent demand growth, sound balance sheets and expanding headcount, but technological disruption is pervasive. Disruptive technologies are likely to lead to much more M&A in telecoms according to our analysts, while lower oil prices will benefit consumer discretionary and staples, which are both set for decent capex growth.
“ WITH THE EXCITEMENT AROUND ‘ABENOMICS’ GROWING,
EXECUTION RISK BEARS MONITORING. WE ARE UNIQUELY
PLACED TO ASSESS ITS PROGRESS, WITH MORE THAN 20
FUNDAMENTAL ANALYSTS PRODUCING DAILY RESEARCH
AROUND ‘ABENOMICS’.”
THE ERA OF CHEAP
FUNDING CONTINUES
As a group, our analysts agree that cheap money is here to stay. Funding costs and default rates are expected to remain stable throughout the year, which means that companies with healthy balance sheets will generally be able to weather storms. Low yields are fuelling M&A as it remains expensive for companies to hoard cash. Equity income strategies remain attractive as dividend expectations for 2015 are very healthy across the board.
Yet differentiation is growing in fixed income too. In China, emerging markets, and energy and materials, a majority of analysts expect default rates to rise from
IT PAYS TO BE SELECTIVE
As differentiation builds across equity and bond markets, and from developed to emerging markets, there will be significant value in the age-old investment job of separating winners and losers. It pays to be discriminating in equity markets when stock-specific return drivers become more prominent and return dispersion rises. Certainly, the drivers that supported the synchronised growth of emerging markets and their brief mistreatment as a ‘homogenous’ bloc are fading, forcing investors to focus more on qualitative and bottom-up factors such as corporate governance, ownership structure and management strategy. Investing indiscriminately by market weight in equity indices runs the risk that investors are heavily exposed to industries, regions, and companies that performed well in the past but are no longer as well placed to perform well in this divergent environment.
In fixed income, as the era of cheap money continues, real returns for investments in government bonds are likely to be below average and remain so for a while.
“ EVEN WITH AN EXPECTATION OF
INCREASING FUNDING COSTS IN THE
US AND EMERGING MARKETS, OUR
ANALYSTS SEE THE ERA OF SAFE
BALANCE SHEETS CONTINUING. OUTSIDE
THE ENERGY AND MATERIALS SECTORS –
AS WELL AS CHINESE FIRMS – STABLE
MANAGEMENT CONFIDENCE AND LITTLE
CHANGE IN DEFAULT RATES OVER THE
COMING YEAR SHOULD SUPPORT M&A
AND DIVIDENDS.”
Fidelity Analyst Survey 2015 9
Our survey shows growing corporate divergence
across regions. While US growth may be easing,
the corporate climate in Europe has taken a turn
for the better; and while China’s demand growth
is moderating, ‘Abenomics’ may finally prove
successful in rekindling spending in Japan.
Meanwhile, emerging markets are facing their
own cocktail of headwinds and tailwinds fanned
by lower oil prices and structural reform efforts.
1. DEVELOPED MARKETS
MORE PROMISING
0
10
1
2
3
4
5
6
7
8
9
KEY SURVEY FINDINGS
LOW OIL PRICE
HEALTHY…
DEMAND GROWTH
CONTINUING
RETURN ON CAPITAL
SUPPORTIVE FACTORS
%
WHAT TO WATCH
AFTER A STRONG 2014
ANALYSTS EXPECT
STABILITY IN…
DEMAND SLOWDOWN
CHINA HARD LANDING
VALUATIONS
RISING
INTEREST RATES
LOW UNEMPLOYMENT
CONTINUING M&A
OUTLOOK FOR OIL PRICE
/ US SHALE
MANAGEMENT
CONFIDENCE
DIVIDEND
PAYOUTS
$600
a year ‘TAX CREDIT’ for consumers
Cash Balances Profit Margins
Source: Reuters Jan 2015
2013
2014
2015
47%
?
MATURING BUT
CONTINUED RECOVERY
US
5.6
Fidelity Analyst Survey 2015 11
THE US RECOVERY IS
MATURING, BUT THE OUTLOOK
REMAINS SUPPORTIVE
Taken together, our analysts’ responses for the US paint a picture of an economy that is firmly in a maturing recovery. While capital expenditure may be scaled back this year (largely due to the energy sector), management confidence (excluding energy) is still sound and returns on capital are expected to remain stable at last year’s healthy levels. Outside the energy sector, the impact of lower oil prices is seen as a strongly positive factor. Demand growth plays a key role in this, which is backed up by the estimates in our Global Aggregation Research Report – a proprietary measure of key fundamentals including valuations metrics provided by all analysts – which show sales growth averaged over all sectors accelerating from 4.8% last year to 5.2% in 2016. Operating profit margins show a similar picture, rising from 14.2% to 15.0% with high margins in all sectors except the consumer and energy sectors. This makes the US by far the most profitable region globally over this two-year time horizon (although some of this is due to currency movements as all figures in the report are in US dollars).
After the large number of mega-deals in 2014, analysts predict that M&A will remain on the agenda this year given healthy credit markets and low funding costs, large cash reserves and strengthening employment numbers. However, they see M&A being increasingly driven by bolt-on acquisitions rather than strategic expansions, with companies buying smaller, higher growth firms to maintain their earnings growth (which has been driving company valuation metrics). Importantly, our analysts think that the majority of CEOs regard demand growth as the main driver of earnings growth.
Meanwhile, cost pressures are contained: energy prices are much lower than a year ago and our analysts expect only a moderate increase in wage cost inflation. In line with market expectations for interest rate normalisation, funding costs are expected to rise. Corporate America’s balance sheets have generally been in excellent shape with ample cash supporting rising dividends, M&A and buyback activity. On a three-year comparison, corporate America’s balance sheets are still strengthening but this does disguise a broad range of responses, with almost four out of ten analysts now reporting moderating balance sheet strength in their respective sectors, in some cases owing to increasing leverage driven by very cheap financing and increased M&A spending over recent years. Nonetheless, almost half of our analysts expect the companies they cover to increase dividends further this year.
GL
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5.6
Source: Fidelity Worldwide Investment, Analyst Survey 2015
Energy
Consumer Staples
IT
Telecoms Financials Healthcare
Utilities Materials Consumer Discretionary Industrials A lot more confidence More confidence Less confidence A lot less confidence About the same 0 0.5 -0.5 -1 -1.5 -2 1.5 2 1
US management confidence
still rising in most sectors
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10
1
2
3
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8
9
MOVING INTO
RECOVERY
EUROPE
5.8
KEY SURVEY FINDINGS
RETURN
ON CAPITAL
BALANCE SHEET
STRENGTH
M&A
STRENGTHENING DEMAND
ECB QE
CORPORATE RESTRUCTURING
BENEFITS FROM
WEAK EURO
MANAGEMENT
CONFIDENCE
SUPPORTIVE FACTORS
WHAT TO WATCH
EUROPE
COMES
SECOND
ON…
€1.1
TRILLION
BALANCE
SHEET
EXPANSION
OIL PRICE OUTLOOK
POLITICAL RISKS
SUCCESS OF QE
Analyst views diverging…
Benefits exporters Rate of €60bn per month
67%
of analysts think balance sheets are healthierLOW OIL PRICE WINNER
WEAKER EURO
M
&
A
DEFLATION
Net oil importer More “+” Less “–” Same “=”CORPORATE RENEWAL IN
EUROPE IN ANTICIPATION
OF DEMAND RECOVERY
In the face of political upheaval in the south and to the east of the eurozone, investors are hoping that the ECB’s €1.1 trillion QE scheme can succeed in reviving economic optimism, so boosting corporate borrowing and consumer spending.
The ECB’s timing may prove right. Continental European companies are profiting from the fall in the euro against the dollar since last year as 20% of their revenues are generated in the US, leading to a significant improvement in the eurozone’s trade balance. The collapse in oil prices since last summer is also a bonus for corporate cost management given the region’s net oil importer status. The corporate renewal theme is continuing, with increasing loan demand for corporate restructuring. Recent years have seen a great deal of internal company reorganisation – as at Siemens, for example – which could start to bear fruit this year, with the influence felt across whole industries. Our survey results bear this out. The consensus is for a slight increase in both dividend payouts and return on capital this year, made possible by expected demand growth (from a very low base) alongside a tight focus on cost control, limited wage cost inflation and lower energy and commodity prices. In fact, half of all analysts state that European CEOs view end-demand growth as the most important source of earnings growth – more so than anywhere else. Moderate M&A activity (mostly in the form of bolt-on acquisitions) will continue to ready the most competitive European companies for any nascent economic recovery. Stable or lower funding costs under QE are supportive of the longer-term strengthening trend in European balance sheets, which remain modestly cautious.
Selective investing remains important as analysts are evenly split on whether capex plans will be expanded, reduced or maintained, reflecting highly differentiated sector fundamentals. Cyclicals have de-rated to their cheapest level versus defensive stocks since the crisis years of 2010-2012, while ‘quality’ stocks – defined by indicators such as good management, unique business franchises, and strong balance sheets – are attractively priced relative to more speculative lower-quality equities. Moreover, European stocks now look attractively valued versus the US, with the relative divergence between the two markets at a 38-year low.
Loan demand for corporate
restructuring has increased
Europe’s relative underperformance
to US at a 38-year record
Source: MSCI, DataStream Jan 2015 Source: ECB Bank Lending Survey Jan 2015
Business loan demand Mergers on credit
5.8
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Fidelity Analyst Survey 2015 13
Overall % change, past 3m
-60% -40% -20% 0% 20% 40% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
MSCI Europe ($)/MSCI USA ($) ratio
0.6 0.8 1 1.2 1.4 1.6 1.8
0
10
1
2
3
4
5
6
7
8
9
KEY SURVEY FINDINGS
MANAGEMENT
CONFIDENCE
PAYOUTS
POLICY
WAGE GROWTH
‘ABENOMICS’ 3RD ARROW
CAPEX
RETURN
ON CAPITAL
BALANCE SHEET
STRENGTH
LOW OIL PRICE WINNER
SUPPORTIVE FACTORS
WHAT TO WATCH
‘ABENOMICS’
DRIVING OPTIMISM
JAPAN
7.1
JAPAN
SCORES
TOP ON…
Analysts expect payouts to be…
Think balance sheets now are healthier than 2014
Reduced 5% Increased 75% Maintained 20%
75%
Expect increasing Return on Capital90%
of energy used in Japan is importedSTALLING WAGE GROWTH
YEN STRENGTH
CHINA SLOWDOWN
DEMAND SLOWDOWN
STRUCTURAL
REFORMS
OF ANALYSTS
EXPECT HIGHER
WAGE COST
INFLATION
ON A PICK-UP IN… 1. CONSUMER PRICES 2. FULL TIME EMPLOYMENT 3. HIRING DEMAND85%
JAPAN: ‘ABENOMICS’ GETS
THE BENEFIT OF THE DOUBT
Japan stands out as the strongest region overall and bucks the trend in a number of areas in the survey, and the results suggest that for the time being at least Japanese companies are giving the ‘Abenomics’ reform programme the benefit of the doubt. Key findings that bode well for Prime Minister Shinzō Abe’s ‘third arrow’ include Japan’s strong performance on management confidence compared to last year and the significant improvement in expected returns on equity. Management confidence is reflected in our analysts’ expectations of a growing preference for capital expenditure on growth rather than maintenance (also bucking the trend seen in other regions). The third arrow: structural reforms aimed at increasing returns on equity
Abe’s third arrow of growth-oriented structural reform puts Japanese companies at the front and centre of reform efforts, with greater capital efficiency being the arrowhead. Measures being taken to encourage companies to allocate capital in a more efficient manner are critical to the arrow’s success, with the prime objective of improving returns on capital. If, as 75% of our Japan analysts surveyed this year predict, returns on capital will continue to rise this year, it should mean that there are ultimately more resources available for further growth and with the prospect of better capital efficiency on the horizon, we should in turn expect higher shareholder returns. The survey also reflects this – 75% of our Japan analysts expect dividends paid by Japanese corporates to increase this year (which would in turn help mechanically improve returns on equity). However, ROCs are starting from a lower base and still remain low by international standards. Our Global Aggregation Report shows an ROE of a mere 9.2% for 2014 for Japan, rising to 9.9% in 2016, compared to 16.4% and 17.5% respectively for the US and 12.1% and 12.7% respectively for Europe. Wage cost inflation: key to a virtuous cycle
In a further sign of confidence in the authorities’ push to reverse deflation, Japan is one of the few geographies in our survey where wage cost inflation is expected, although again from a low base. Changing the mind-set of consumers and companies is a critical step-change if ‘Abenomics’ is to succeed. Increased consumption and investment will lift prices and profits, driving growth and ultimately more investment, completing a virtuous circle. While ‘Abenomics’ has succeeded in creating inflation, an increase in real wages has yet to appear as strongly. In 2014, there were some promising signs of nominal wage growth but in real terms wage growth has not kept pace with inflation. Yet there are now plenty of forces pushing for wage growth, including rising consumer prices, robust growth in full-time employees and stronger hiring demand across all types of workers. On the back of this, companies are beginning to become more accepting of wage increases.
75% of analysts expect Japanese
ROEs to continue improving
The virtuous cycle
7.1
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Fidelity Analyst Survey 2015 15
Source: Fidelity Worldwide Investment 2014 Source: MSCI, DataStream 25.02.2015
MSCI Return on Equity %
-5 0 1 10 15 20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Balanced Budget Inflation Growth strategy Raised growth &
inflation expectations, improved sentiment Abenomics Yen depreciation Wage increases, higher bonuses driven by performance
0
10
1
2
3
4
5
6
7
8
9
CAUTION AMID
THE SLOWDOWN
CHINA
4.4
KEY SURVEY FINDINGS
STABLE ON…
WEAK ON…
CAPEX
RETURN ON CAPITAL
MIXED MACRO FACTORS
WHAT TO WATCH
EXPECT
DIVIDENDS
TO BE
MAINTAINED
69%
Expect Lower Returns on CapitalPROPERTY/FINANCIAL DEFAULTS
CREDIT RISK
DEFLATION
M&A
DIVIDEND PAYOUTS
MANAGEMENT CONFIDENCE
Stabilised Analysts expect declining CapexLOWER OIL PRICE
SUPPORTIVE
TRANSITION TO A
CONSUMER LED ECONOMY
EMPHASIS ON
COST CUTTING
LACK OF
PRICING POWER?
DEMAND GROWTH
SLOWING
INDUSTRY RESTRUCTURING
/ MARKET CONSOLIDATION
$100
bn
Estimated savingDEMAND SLOWDOWN
0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 68.8% Declining 18.8% Increasing 12.5% Stable 55% 9% 18% 18% Reasons for declining returns
CHINA: CAUTION
AMID THE SLOWDOWN
The slowdown in economic growth and demand in China resonates across our survey. It is seen as a key overall risk, with analysts in all regions suggesting any accelerated slowdown in China is a key risk to growth expectations in their geographies. But despite the economic slowdown, opportunities for income investors remain, with 81% of our analysts expecting dividends to be maintained this year. Within China itself, the survey indicates that Chinese companies are feeling a greater sense of caution than last year. In aggregate, management’s confidence to invest in their businesses is no longer improving and capital expenditure plans have been scaled back more so than in other regions, swinging from an increase in organic capex plans expected for 2014 to an expected decrease for this year. Cost reduction, which China’s CEOs thought would not be a key driver of earnings at all last year, is now regarded as a significant earnings driver, while demand growth plays a far smaller role than last year.
Market consolidation
China recorded GDP growth of 7.4% last year, slightly higher than most estimates but still the slowest growth rate seen for more than 24 years. While slowing growth is generally seen as necessary and positive for an economy of its size and recent rapid growth, the cautionary outlook implied by our survey points to further industry restructuring and market consolidation, and possibly increased credit risk as some industries may disappoint while others may flourish as the economy continues its transition. Unlike the rest of Asia including Japan, our analysts expect default rates in China to increase slightly compared to last year. Given the increasing asset quality pressures amid the slowing economy, the banking sector may see some headlines around the financial difficulties of smaller financial institutions including credit unions, rural commercial banks and non-banks. Banks are less willing to extend loans to sectors such as metals and mining and smaller property developers where asset quality pressures are arising, but they may accept some debt restructuring on a case–by-case basis. However, a systemic crisis does not appear likely in 2015 as the government effectively controls both the lenders and borrowers and the major banks’ loan books are still concentrated in state-owned enterprises.
In the property sector, some small or medium-sized property credits may well default or restructure. Developers focusing on lower-tier cities are particularly vulnerable as they face significant oversupply, slowing sales and price weaknesses.
Chinese returns declining,
pushed down by slowing demand
4.4
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Fidelity Analyst Survey 2015 17 Joining the loosening club
In the face of capital outflows, deflation risks and slowing economic and demand growth, authorities in China have taken action to stimulate the economy. On 1 March the People’s Bank of China cut both the one-year benchmark lending rate and the one-year benchmark deposit rate by 25bps. This followed a cut to the Reserve Rate Requirement of 50bps in February 2015 that injected around RMB600 billion of liquidity into the market. These significant and broad loosening steps indicate the government’s willingness to adopt broader easing measures (in contrast to the targeted mini stimulus measures taken last year) and their readiness to take action to stimulate the economy and increase demand.
A further significant buffer to the cautionary outlook could be the positive impact that our analysts expect China to receive from substantially lower energy costs. As the world’s second largest net importer of the commodity, every US$1 drop in the oil price is estimated to lead to annual savings of US$2.1bn, so the 50% oil price decline amounts to a saving of over US$100bn.
Source: Fidelity Worldwide Investment, Analyst Survey 2015
EMERGING MARKETS:
OVERALL CONCERNS MASK
DIVERGING FORTUNES
Our analysts think that management confidence in the emerging world has taken a turn for the worse as currency volatility has increased, particularly in EMEA and Latin America where large energy sectors have been badly hit and the rising dollar is raising funding costs. More than half see capex being scaled back with a swing towards maintenance spending, away from growth investments, as analysts agree that cost efficiency measures are becoming the leading driver for industry returns. Even when we exclude the energy sector from the results, management confidence is still down on last year.
But there are also some clear winners from lower oil prices, which help to balance the overall results and support dividends, which are expected to remain stable or increase by the vast majority of analysts. For example, two-thirds report that companies in Asia Pacific
(excluding Japan and China) will benefit from low energy prices, more so than anywhere else in the world. In a further indication of diverging country and sector paths, a third of respondents predict an increase in dividends for their companies in Asia (excluding Japan and China) and more than half see balance sheets strengthening further, partly because sentiment on cost price inflation is markedly more sanguine than last year. Varying success on corporate and economic reform also complicates the picture: countries which are making efforts to reform will offer better investment opportunities than those emerging markets which are not reforming. In India, for example, good progress is being made under new Prime Minister Modi in certain areas, largely through Modi exercising his own executive authority. The supply situation in coal and power has improved, investment project clearances have accelerated, FDI limits have been increased in several industries and the lack of financial inclusion is being tackled.
EMEA/Latin America have the highest
exposure to currency fluctuations
1 2 3 Low Moderate High
4.3
5.3
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GL
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2. DIVERGING
OPPORTUNITIES
ARE PUSHING
SECTORS APART
Fidelity Analyst Survey 2015 19
At first sight, our survey results appear more muted
than last year. On balance, our analysts think
management confidence is slightly deteriorating, returns
on capital are no longer seen to be improving and
default rates are expected to rise. Yet a closer look at
the data reveals this is not the full picture. Lift the lid on
some key indicators and hints of building divergence
emerge, confirmed by a more detailed sector analysis.
0
10
1
2
3
4
5
6
7
8
9
WEAKEST SECTOR
ENERGY
2.1
KEY SURVEY FINDINGS
BOTTOM IN OUTLOOK FOR…
REGIONS…
SECTORS…
LOW FUEL TAX
HIGH ENERGY
SPENDING
LOWER
INPUT
COSTS
FOR ALL
SECTORS
DRIVING DIVERGENCE BETWEEN…
LOSERS
LOSERS
WINNERS
WINNERS
WHAT TO WATCH
OPEC STRATEGY
DEFAULT RISKS
TACTICAL VALUATION
OPPORTUNITIES
NET OIL EXPORTERS
HIGH COST PRODUCERS
E&P & OIL EQUIPMENT
NET OIL IMPORTERS
ALL CONSUMERS
CONSUMER DEPENDENT
MANAGEMENT
CONFIDENCE
RETURN ON CAPITAL
PAYOUTS POLICY
CAPEX
DEFAULT RATES
BALANCE SHEET HEALTH
OIL PRICE
of analysts expect default rates
to increase of analysts report
significantly less confidence
all analysts
expect reduction e.g. Russia e.g. India
e.g. US Shale Countries with or e.g Airlines
92%
85%
100%
of analysts expect a decline0
10
1
2
3
4
5
6
7
8
9
Fidelity Analyst Survey 2015 21
STRONGEST SECTOR
HEALTHCARE
6.8
KEY SURVEY FINDINGS
A GOLDEN AGE FOR HEALTHCARE
WHAT TO WATCH
ONCOLOGY
IMMUNOTHERAPY
VIROTHERAPY
GENE THERAPY
60%
Expect an increaseREGULATION (E.G. OBAMACARE)
PRICING POWER
DISRUPTIVE TECHNOLOGY
INNOVATION
PAYOUTS POLICY
M&A
MANAGEMENT CONFIDENCE
RETURN ON CAPITAL
POPULATION GROWTH
EMERGING MARKET
CONSUMER
STRUCTURAL GROWTH
IN GLOBAL HEALTHCARE
POPULATION AGEING
MAJOR M&A
HEALTHCARE
SCORES TOP ON…
HEALTHCARE
COMES SECOND ON…
Analysts expect payouts to be…Increased
SECTOR WINNERS CAPITALISE
ON CHEAP FUNDING AND LOW
COST PRESSURES
Most revealing, almost exactly equal numbers of analysts predict worsening, stable and improving returns on capital – clearly a sign of diverging sector fates. Moreover, overall dividends are still expected to rise slightly over the next 12 months, M&A activity remains firmly on the cards, cost and wage price inflation will be even less of an issue than last year, the cost of capital remains low and balance sheets continue to strengthen over the medium term while remaining somewhat on the cautious side. Cheap money will be around for longer than forecast last year, so there is no pressure for companies to rush into any balance sheet funding.
The survey’s aggregated predictions are heavily skewed by energy sector developments. Management confidence, not surprisingly, has taken a hit in the energy and materials sectors but is in fact rising on last year in most other sectors, led by telecoms, healthcare and IT. Aggregate capex growth for all sectors has been curtailed by the drop in the oil price, as energy capex makes up over 30% of global capex. However, sharply lower capex plans in energy and materials contrast with broadly flat to rising spending elsewhere, in particular healthcare, IT and telecoms. Our proprietary Global Aggregation Report, an internal snapshot of valuations metrics on a US dollar basis provided by all analysts, shows energy as the cheapest sector by far with a P/E of 10.1 in 2014. But once the lower oil prices and 2014 year-end results will have been worked into analysts’ valuation models, the sector is likely to look less attractive as already reflected in the predicted P/E rise to 15.2 this year. This compares to a total all-sector average of 15.5 last year falling to 15.1 this year.
Last year’s survey flagged M&A as a key theme for 2014, which turned out to be the case. Against a
“ THE SURVEY’S AGGREGATED
PREDICTIONS ARE HEAVILY SKEWED
BY ENERGY SECTOR DEVELOPMENTS.
MANAGEMENT CONFIDENCE, NOT
SURPRISINGLY, HAS TAKEN A HIT IN
THE ENERGY AND MATERIALS SECTORS
BUT IS IN FACT RISING ON LAST
YEAR IN MOST OTHER SECTORS.”
OIL PRICES: A STORY
OF WINNERS AND LOSERS
The remarkable decline in the global oil price since the second half of 2014 is undoubtedly one of the stand-out themes of our 2015 Survey. While lower prices will have multiple negative effects on the energy and related sectors, the impact is more favourable for many other sectors, owing to declining input costs and/or more supportive consumer demand conditions. In terms of the energy sector itself, in marked contrast to the previous year, 85% of analysts found managers to be much less confident about the business outlook for the year ahead. Unsurprisingly, in terms of the 10 sectors covered, this was by far the most negative response.
The collapse in oil prices has clearly altered the fundamental economics of oil exploration and production in many global regions, particularly in terms of relatively high-cost plays such as US shale oil. This is reflected in capex plans with 100% of energy sector analysts expecting at least a moderate reduction in fixed investment in the year ahead and 77% a more pronounced reduction among the companies they cover. Moreover, since the energy industry is so capital intensive, this will have a negative impact on global capex more generally. Areas like oil equipment are also suffering, as onshore and offshore drilling are facing severe headwinds and reduced activity is putting downward pressure on contract pricing and putting future margins at risk. This makes life difficult for
“ THE COLLAPSE IN OIL PRICES
HAS CLEARLY ALTERED THE
FUNDAMENTAL ECONOMICS
OF OIL EXPLORATION AND
PRODUCTION IN MANY GLOBAL
REGIONS, PARTICULARLY IN
TERMS OF RELATIVELY HIGH-COST
PLAYS SUCH AS US SHALE OIL.”
Energy is a large share of global
non-financial corporate capex
S&P 500 capex expected to fall 3% in 2015,
pushed down by a 25% drop in energy capex
Winners and losers from lower oil prices
Source: S&P Global Corporate Capital Expenditure Survey 2014, S&P Capital IQ, S&P Ratings’ calculations, IMF (July 2014 estimate)
Source: Goldman Sachs Global Investment Research 29 January 2015
Source: Fidelity Worldwide Investment, Fidelity Solutions Group, December 2014 0% 800 700 600 500 400 300 200 100 67% -3% -25% 33% Capex ( $ bn) 2014 2015 Energy Energy
Materials Other sectors
Other sectors 58% 32% 10% 15% 10% 5% 2% 4% 6% 8% 10% 12% 14% 16% 18% 0% -5% -10%
Net Oil Imports, % GDP
Energy CPI Weight Biggest losers Biggest winners Russian Federation Colombia Mexico Canada Brazil United Kingdom
Germany Czech Rep. Poland Turkey Spain Hungary Greece Chile South Africa Rep. of Korea Thailand India USA Japan China Indonesia Italy Sweden France Philippines Norway companies like engineering, construction and drilling
specialist Saipem – and that was before Russia cancelled the South Stream project that was to take oil from Russia to Bulgaria across the Black Sea, in which the company was to take part.
On the other hand, for the most part, the impact of low oil prices will be largely positive in sectors outside of the energy sector. With the exception of the energy and materials sectors, analysts covering all other sectors said they expected at least some positive impact from declining oil costs. With low fuel prices effectively boosting disposable incomes in oil-importing regions, the consumer staples and consumer discretionary sector are seen as the biggest sector beneficiaries.
For example, as oil prices fall, US auto manufacturer General Motors benefits from increased disposable incomes, increased demand for less gas efficient but higher-margin SUVs, as well as lower plastics input costs. On the other hand, in the same industry, electric vehicle (EV) producer Tesla loses out from lower oil prices because this lessens EVs’ relative running cost advantage compared to traditional combustion engine vehicles.
US Shale Industry
Lower oil prices constitute a sharp negative revenue shock for the US shale energy industry. With oil prices below so-called ‘break-even’ rates in many producing regions, investment in the sector has already been pared back significantly, as reflected in declining rig counts – running at 18% below the previous year’s level as of mid-February.1 As such, the impact on US shale
producers is exactly in line with what OPEC would have hoped for when it surprisingly decided not to cut back its production in November 2014. Despite this, Fidelity analysts believe the US shale industry will remain viable in the long run owing to:
• production costs being positively correlated with oil prices (they tend to go down when oil prices fall) • continued improvements in production efficiency,
for example via enhanced drilling techniques • the practice of ‘hi-grading’ whereby producers
concentrate their efforts and resources on lower-cost plays in each region
• market forces – price falls should stimulate demand and reduce overall supply, thereby supporting prices in the longer run.
1. North America Rotary Rig Count, Baker Hughes, 11.02.2015
HEALTHCARE: INNOVATION AND
NEW DRUGS DRIVING CONFIDENCE
Long-term demand for healthcare is being supported by global demographics and strengthening emerging market demand. Crucially however, the ability of the healthcare industry to meet this demand is also improving thanks to a markedly accelerating pace of innovation that is evidenced by new drug discoveries and a pipeline of exciting new drugs that address significant unmet medical needs. In turn, this is reflected in a high level of confidence reported by Fidelity analysts among healthcare company managers, the highest of all covered sectors.
Healthcare management confidence is further underpinned by a healthy rate of scientific breakthroughs. In contrast to the 2000-2010 period when relatively few scientific breakthroughs were made that resulted in approved drugs, today, many new products are being approved in areas of unmet medical needs in cardiovascular, cancer and hepatitis treatment areas. Indeed, the next several years look comparable to the golden productivity period of 1992-98 in terms of new discoveries.
A key driver of increasing innovation in healthcare is improving productivity at the lab stage as better drug targets are found from the ever-increasing bank of knowledge within biological sciences. This is combining with a more favourable US regulatory environment owing to the US Food & Drug Administration (FDA) upgrading its in-house abilities in order to keep up with the growing flow of new products. It’s notable that the FDA has approved more drugs in the last three-year window than in any other equivalent three-year period. In the last four years, 65 drugs have also been given faster approval through the FDA’s ‘Breakthrough Therapy (BT) Designation’ process.
In terms of some specific examples of innovation, Novartis has a breakthrough drug to treat heart failure while Sanofi is developing a class of drugs called PCS K-9’s that significantly lower cholesterol, which will reduce the risk of strokes and heart attacks. There are some exciting developments in the field of oncology where less invasive treatments to chemotherapy are being developed. A global leader in the field is Roche – the Swiss company’s US-based Genentech subsidiary in February received expedited FDA designation for a new class of drug in immunotherapy that could be used to treat both lung and gall bladder cancer.
20 30 40 50 60
FDA new drug approvals reached a peak in
2014 only surpassed once before (in 1996)
Fidelity Analyst Survey 2015 25
TELECOMS: CONFIDENCE
TO DRIVE M&A
Along with healthcare, our analysts’ views of management confidence in the telecoms services sector is one of the highest in our survey. Indeed, 100% of analysts covering the sector reported management to be equally or more confident than last year, a higher level than any other sector.
The comparatively high level of management
confidence reflects both a supportive market backdrop that is likely to see continuing consolidation and the sector’s growing scope for innovation, owing to the convergence of communications technologies. While it is difficult to generalise across regions, in the US, both average revenue per user and competition have been reasonably stable for some time now, while in Europe the situation is seen as improving because of signs of a long-awaited breakout from a multi-year profits down-cycle. This is partly driven by inflecting mobile revenues and structurally rising wireless data revenues.
A key element of the generally supportive backdrop is the low interest rate and yield environment – traditionally this supports the sector mainly through reduced debt financing costs and to a lesser extent via supportive consumer demand conditions. This continues to be the case now, and among the more notable findings of the survey was an expectation of further consolidation in the sector. Examples are the recently announced mergers of BT and EE, and of O2 and Three network-owner Hutchison Whampoa.
Perhaps surprisingly for a sector generally perceived as defensive, 85% of Fidelity sector analysts judged the telecoms sector to be prone to moderate or high impact from disruptive innovation, second only in this regard to the technology sector. In large part, this reflects the convergence of different technologies in the telecoms and communications space. A good example of this is provided by Belgium’s Telenet – a traditional fixed-line and broadband operator that has launched an innovative mobile service centred on public Wi-Fi coverage through which it has already achieved a 20% market share in the Flemish half of the country. One of the telecoms services companies benefiting from supportive market conditions is the UK’s BT. Attractive financing conditions should support BT’s proposed takeover of UK mobile operator EE and the company scores highly in terms of innovation due to its successful efforts to reinvent itself through both mobile and content delivery as one of the UK’s leading convergent operators. Remarkably, almost 9 out of 10 analysts say regulation will have a significant impact on the sector, but only 3 out of 10 think that this is fully reflected in valuations; this is likely to be another disruptive factor for investors to consider, making a discriminating approach to the sector invaluable.
Telecoms is the sector focusing
most on M&A in the next 1-2 years
Source: Fidelity Worldwide Investment, Analyst Survey 2015
“ 100% OF ANALYSTS COVERING THE TELECOMS SECTOR
REPORTED MANAGEMENT TO BE EQUALLY OR MORE CONFIDENT THAN LAST YEAR, A HIGHER
LEVEL THAN ANY OTHER SECTOR.”
0 2 3
Energy
Con. Disc. Financials Materials
IT
Con. Staples
Utilities
Industrials Healthcare Telecoms
Moderate amount Not at all To a large extent Huge strategic priority 1
CONSUMER SECTORS: OIL
PRICES SUPPORTIVE IN A
COMPETITIVE CLIMATE, BUT
STAPLES UPSIDE LIMITED
With deflationary forces taking hold around the world, retail price wars intensifying and consumer confidence still fragile in many markets, our survey reflects declining levels of management confidence in the consumer discretionary sector compared with a year ago. The staples sector, meanwhile, is holding up a little better with confidence levels only marginally down on last year.
Nonetheless the relatively stable outlook for costs over the next couple of years generally supports consumer company margins. Lower oil prices could have a very positive impact through reduced logistics costs across the supply chain and higher demand owing to increased levels of consumer disposable income, particularly in emerging markets where fuel costs account for a large share of household spending, and in the US, where fluctuations in the oil price feed through more directly to consumers due to lower tax levels. When lower oil prices are due to increased oil supply, consumer stocks tend to benefit – particularly discretionary ones. This situation contrasts with the more common historical pattern of lower end-demand leading to falling oil prices, in which defensive stocks tend to outperform.
Lower costs are positive for food, household and personal care, food and online retailing as well as cruise lines. On the other hand, higher discretionary spending power among consumers because of lower gas prices is good news for leisure, food, general retail, and – again – cruise lines. Carnival, with a fleet of cruise ships operating around the world, is a good example; it is benefiting from a supportive supply environment in the short term (although investors will be watching closely whether demand will meet the higher supply of ships that will come on-stream in 2016 and any new
“ LOWER OIL PRICES COULD HAVE A
VERY POSITIVE IMPACT THROUGH
REDUCED LOGISTICS COSTS
ACROSS THE SUPPLY CHAIN. ”
Search for yield leads to staples sector
positive impact on consumer sectors
Source: Company reports, Fidelity Worldwide Investment Credit Research 2015 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1995 2000 2005 2010 2015 IT Major positive Positive No impact Negative Major negative Energy Con. Disc. Financials Materials Con. Staples Utilities Industrials Healthcare Telecoms
Staples sector earnings yield
10-year govt bond yield (avg of Germany, France, UK and US)
110 120 130 140 150 160 170 4 6 8 10 12 14
Fidelity Analyst Survey 2015 27 When it comes to expected capex changes over the
next year compared with the previous year, there is a positive outlook for staples and discretionary stocks with more than two-thirds of analysts expecting the same or increased capital investment. Both sectors come top of the survey for expected growth capex over the next 12 months – they are the only ones likely to invest more than 50% of their capex on growth. This is driven in part by a catch-up in building materials in markets like the US and the UK following a capex squeeze in the downturn, and by online retailers investing in their services (compensating for store-opening capex declines). Margins have recovered sufficiently in the UK and the US that earnings are now led by demand growth rather than cost-cutting. Companies like Wolseley, a global distributor of heating and plumbing products and supplier of builders’ products to the professional market, are reaping the benefits from more confident US consumers and a stronger housing market in particular.
Almost half of all analysts still expect improving returns on capital and rising dividends for the consumer staples companies they cover. Yet with low government yields persisting, investors often buy these staples in their search for yield on the assumption that de-ratings and defaults are less likely than in higher-yielding corporate debt markets, and believing that underlying growth in these assets can continue to feed dividend growth. Hence our analysts report that consumer staples stocks are starting to look expensive on a historical comparison. This is backed up by our Global Aggregation Report, which shows the sector to have the highest P/E of all at 20.9 last year and 17.7 next year (led by Japanese stocks), compared to averages of 15.5 and 13.5 respectively for all sectors.
CONSIDERABLE BALANCE SHEET
REPAIRS IN UTILITIES, BUT OIL AND
GAS PRICES CREATING NEW RISKS
The survey’s key finding in utilities is the significance of balance sheet repairs: last year they were still seen deteriorating but a large majority now report healthier balance sheets after large-scale asset sales. Our analysts report that in a notable break with the past, utility companies are no longer debt-financing dividends but paying these out of cash.
However, some of this improvement in integrated utilities may be at risk from lower commodity prices and gas prices – which have started to trail oil prices down on adverse weather, demand and capacity trends, and are lowering electricity prices. This is creating pressure on earnings and uncertainty for dividends of integrated
utilities. European integrated utilities are particularly affected, as they are also suffering from a combination of slowing demand and massive overcapacity following the growth in renewable energy on the back of large subsidies for wind and solar power.
This helps to explain why analysts are split on whether returns on capital are declining (blaming a lack of pricing power) or increasing (ascribed to cost reductions and regulatory changes). Capex spending also reflects tenuous market conditions with a majority of analysts predicting a moderate or significant reduction in capex and flagging a noticeable shift towards more maintenance spending. Germany-based RWE, one of Europe’s leading gas and electricity providers, for example, has cut its capex plans by two-thirds from about €6 billion to €2 billion.
In the US, utility stocks have been strong outperformers but most of this has come from the regulated sector (where generation and/or transmission and distribution are regulated by the relevant authorities). Regulated utilities stocks are less vulnerable to lower commodity prices and more bond-like in character, benefiting from low sovereign yields and monetary easing. Given this outlook, the majority of analysts think valuations are a little on the high side, while credit analysts remain cautious on some utility assets. Despite this, as earnings are expected to remain stable, dividend expectations for the sector are positive. Not a single one of our analysts expects companies under their coverage to cut or scrap their dividends, while half expect a further increase as companies continue to recognise the importance of a steady dividend yield for investors.
New threats are also disrupting the IT security market. High-profile security breaches – as seen with Target and Sony Pictures in the US – highlight the enormous challenges for companies in managing their data. In the aftermath of the Snowden affair, these corporate breaches also reveal how the sector is becoming increasingly politicised, as data security becomes a matter of national interest with US vendors facing increasing distrust abroad, and China pushing its own indigenous IT industry. There are considerable opportunities for security software vendors that manage to meet growing demand with strong products. Predictably, comments from IT service vendors reveal that tech spending in energy and utilities, aerospace and European telecoms is weak but spending in healthcare, financial services and manufacturing remains strong. Regionally, the sector is supported by IT-related job growth in the US, which picked up after a dip in 2014 and is a strong indicator for US tech spending. A stable 2.2% of US GDP is spent on IT but within this the share of hardware is declining. Our analysts also see relatively high exposure to FX volatility, reflecting the industry’s global character, which they regard as a tailwind for European tech companies. Low oil prices should lead to second-order positive effects on spending from sectors exposed to consumer and retail demand or those with high sensitivity to oil input costs (e.g. airlines). The headcount outlook for IT is the strongest of all sectors with almost 70% of analysts reporting that at least half of their companies will be expanding headcount. Consequently, all analysts expect a moderate or strong increase in wage cost inflation but this is still seen as manageable as balance sheets are continuing to strengthen: leverage is low, default rates are stable or falling and only a small proportion of companies need to raise capital.
IT: A TALE OF DISRUPTION
AND DISPERSION
More than any other sector, IT is characterised by dispersion in the face of very high industry disruption from new technology developments. There is no doubt that the market will look very different in just a few years’ time.
Averaged over all our global IT analysts, management confidence is seen to be stable or rising (as are capex and dividend levels), and a majority say their companies are at an expansionary stage in the industry cycle. It is also the only sector where the majority of analysts think that CEOs see market/end-demand growth leading earnings growth. This chimes with CIO surveys which show an uptick in external IT spending growth expectations globally in software, communications and services particularly in retail and manufacturing.
Disruption is a central theme. For example, legacy enterprise IT vendors, such as IBM, are finding themselves under threat from new market entrants in a relatively short space of time and need to continually reinvent themselves, as currently with the speedy rise of cloud computing and online software. Conversely, companies like Ubisoft, the France-based multinational console game leader, are capitalising on change such as consolidation in the video game market, increasing digital revenue and growing barriers to entry due to rising development costs.
Overall CIO IT spending
expectations are moving upward
5% 4% 3% 2% 1% 4.3% 4.3% 3.4% 4.4% 4.0% 4.3%
3. INCOME: CHEAP
FUNDING FOR LONGER,
HEALTHY DIVIDEND
OUTLOOK
Fidelity Analyst Survey 2015 29
Cheap money is here to stay – at least for a little
longer than envisaged last year – forcing investors
up the risk scale. This shines through consistently
in our survey results as funding costs and default
rates are generally expected to remain stable,
allowing companies with stronger balance sheets,
particularly in Europe, to weather storms.
LOWER FOR
LONGER
Low yields have also fuelled M&A activity as companies look to deploy their cash more productively, and our analysts expect this to continue across regions and sectors.
One of the strongest findings of the survey is the strength of dividend expectations across the board: less than 10% overall expect dividends to be cut or scrapped as companies try to avoid the negative signals such actions send. Three out of four analysts expect higher dividends from their companies in Japan, almost 50% predict rising payouts in their sectors in the US and in Europe a third of analysts see their companies increasing dividends. Looking at the same data by sectors, the number of analysts reporting dividend increases is highest in healthcare, consumer staples and utilities. In fact, the only sector likely to see a significant decline in payouts is energy, where operating margins and profits are under severe pressure.
Yet there is growing differentiation in income too. In China and the non-Asian emerging markets, at least half of our analysts are predicting rising default rates, and almost all respondents predict more defaults in energy and materials. And there is near-unanimous agreement that funding costs will increase for energy firms on wider spreads, as earnings are squeezed in difficult market conditions. This matters as a relatively high percentage of energy firms will need to raise capital this year, compared to other sectors.
Analysts expect dividend payouts to
be very strong, especially in Japan
Dividend yields expected to rise
across all sectors and regions
Source: Fidelity Worldwide Investment, Analyst Survey 2015
Source: Fidelity Worldwide Investment Global Aggregates Report February 2015
China
EMEA/Lat Am
Europe
Asia Pacific
ex Japan and Chin
US Japan 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 75%
Plan to maintain payout Plan to increase payouts
Sectors 2014 2015 2016 Consumer discretionary 2.0% 2.3% 2.6% Consumer staples 2.6% 2.8% 3.1% Energy 4.0% 4.0% 4.2% Financials 3.2% 3.5% 4.2% Healthcare 1.8% 1.9% 2.1% Industrials 2.3% 2.6% 2.8% IT 1.5% 1.7% 1.8% Materials 2.9% 3.1% 3.3% Telecoms 3.9% 3.9% 4.1% Utilities 4.0% 4.0% 4.3% Average 2.7% 2.8% 3.2% Regions 2014 2015 2016 US 1.9% 2.1% 2.4% Europe 3.3% 3.6% 3.9% APxJ 3.1% 3.2% 3.5% Japan 1.9% 2.1% 2.3% EMEA/LATAM 4.1% 4.1% 4.3%
Average 2.7% 2.8% 3.2%
“ THE SURVEY’S THEME OF DIVERGENCE IS
ALSO EVIDENT IN GROWING DIFFERENTIATION
IN FIXED INCOME.
“ CHINA IN PARTICULAR STANDS OUT WITH
ANALYSTS EXPECTING RISING ASSET
QUALITY PRESSURES IN BANKING, METALS
AND MINING AND PROPERTY, TRANSLATING
INTO CREDIT EVENTS, DEBT RESTRUCTURINGS
AND, IN SOME CASES, OUTRIGHT DEFAULTS.
WE COULD SEE SOME SMALLER FINANCIAL
INSTITUTIONS GETTING INTO DIFFICULTY
BUT CONTAGION RISK SHOULD BE LIMITED
AS THE CHINESE GOVERNMENT CONTROLS
THE LARGER LENDERS AND BORROWERS.
“ AS CHINA’S ECONOMY CONTINUES ITS
Fidelity Analyst Survey 2015 31
Rising funding costs put pressure on
materials and energy sectors
Source: Fidelity Worldwide Investment, Analyst Survey 2015
Regions vary in their position
within the credit cycle
Source: Fidelity Worldwide Investment February 2015
Industrials
Utilities
Telecoms
Con. Staples
Con. Disc. Materials
Energy Healthcare IT Financials Increase Decrease Same 1 0 -1
In the US, 36% of analysts predict rising funding costs, which they expect to be met in fairly even parts by bond issuance, equity financing and bank funding. In emerging markets, both in Asia and elsewhere, a majority expect a higher reliance on bank funding to cover rising funding costs. In Europe, however, the handful of analysts forecasting an increase in funding costs think this will be financed by more bond issuance. Although the credit cycle is clearly maturing, our analysts do not appear to raise any significant concerns beyond the growing need for discriminating credit research. Only a quarter of our analysts regard their companies’ balance sheets as stretched and equal numbers report they are weakening, but over half still report healthier or even considerably healthier balance sheets, and regard them as modestly to very cautious. There are some signs, however, that the boom in high yield corporate issuance in emerging markets may affect the corporate outlook as 4 in 10 analysts in emerging markets think balance sheets are now modestly stretched.
4. WHAT ARE
THE RISKS?
We asked our analysts what they regarded
as the main risk factors for their sectors and
regions. Given that they cover almost the entire
investable universe, the response is predictably
diverse. But the concern that seems to preoccupy
our analysts most is the outlook for global growth
and end-demand, and the possibility that the
business cycle takes a turn for the worse
DEMAND
CONSUMER
POLITICAL
CHINA
US
RATE
SECTOR
EUROPE
FX
CAPEX
GROWTH
COST
PR
ICING
MA
CR
O
JA
PA
N
CYCLE
PRICES
OIL
GLOBAL
REGULA
TION
COMP
ETITION
Fidelity Analyst Survey 2015 33
They list a range of issues that could drain economic growth and negatively affect end-demand. Among these are global liquidity, the success of QE in Europe and the risk of a ‘Grexit’, as well as the timing and extent of US interest rate hikes – a risk for certain emerging markets with fragile balance of payments positions. The risk of a hard landing in China is also widely mentioned. Mining and metal spreads, for example, are currently pricing the latter in as a possibility, but not one that’s very likely. Consumer stocks would suffer from a decline in consumer confidence if employment trends weaken or housing prices suffer.
Political risks also feature prominently, and further oil price falls would be troublesome for oil-producing countries and regions and exploration companies themselves. Falling margins (weighing on top-line growth) are feared as competitive pressures remain intense in most industries, particularly if raw material prices decline further. Intensifying deflationary pressures and currency volatility, disruptive technologies or business models, low capex growth, the prospect of stalling reforms in China, India and elsewhere, and increased regulation all add to the mix that our analysts keep a close eye on.
5. IS THERE WISDOM
IN CROWDS?
LAST YEAR’S PREDICTIONS
PROVED ACCURATE
Why do we conduct this survey? As an asset manager, we are unusual in that we in-source our research and invest significantly in proprietary analysis. The main benefit and purpose of our research is to uncover under- and overvalued companies, but when aggregated, as in this survey, our analysts views’ can also provide valuable insights into the state of the markets.
The results of last year’s survey bear this out. In our 2014 report, we correctly forecast growing management confidence and shareholder-friendly actions, favoured
DEMONSTRABLE ADDED VALUE
IN OUR ANALYST OPINIONS
At Fidelity Worldwide Investment, we embrace an active investment style based on the deep and comprehensive bottom-up research undertaken by our investment teams. In fact, we have one of the largest buy-side global research networks in the asset management industry. Of our over 400 investment professionals, half are dedicated research professionals located in major financial centres in 12 countries around the world. The average experience of our equity, credit and quantitative analysts is around 10 years.
