The Recovery is real

Fidelity International

Fidelity International

Evidence from Fidelity’s 2017 Analyst Survey suggests that the global reflation/recovery is in full swing. Demand, capex expectations, and consumer sentiment are picking up, while the first signs of inflation in prices and wages are beginning to show up. Fidelity’s Analyst Survey draws on the 17,000 meetings our analysts conduct each year to gain an aggregate measure of sentiment based on that access as well as a wealth of proprietary analysis.

Demand growth is now the largest driver of earnings growth

What do the CEOs in your sector see as the main source of earnings growth for their companies?


Equally, analysts say chief executive officers regard demand-led growth as the main driver of earnings growth for their companies, whereas last year they were looking to cost efficiencies. The greater confidence of management teams in end demand growth is a very positive finding of this year’s survey.

‘The greater confidence in end-demand growth is a very positive finding of this year’s survey.’

Is the bottom of the capex cycle in sight?

As a global recovery takes hold, could it be that we have reached the bottom of the capital spending cycle? Our survey certainly suggests it may be. For the first time in three years, the balance of our analysts is positive on capex, with a slightly growing emphasis on growth rather than maintenance spending. At the margin, China analysts see capex spending falling further, but this is to be expected in an economy that is transitioning from investment and export-led growth to a consumer-led model.

Low investment spending in the past has contributed to low productivity growth, which in turn has depressed economies’ potential growth rates, demand, inflation, interest rates and yields in what is often termed ‘secular stagnation’. A recovery in capital spending could encourage innovation and productivity growth, making this observation particularly encouraging. The energy, materials and industrial sectors are the leaders of this recovery in capex sentiment, indicating much of it may be a cyclical recovery which is related to the oil price.

Global capex could be bottoming out

How do organic capex plans for your companies over the next 12 months vary versus the last 12 months?


Analyst sentiment is turning positive on capex, except in China

How do organic capex plans for your companies over the next 12 months vary versus the last 12 months?


However, there are some secular changes, with more than half of our IT analysts also expecting rising investment within the technology industry, reflecting the sector’s crucial position at a time of disruptive innovation and thin margins.

‘Old economy’ sectors are no longer slashing investment

How do organic capex plans for your companies over the next 12 months vary versus the last 12 months?

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We see the same positive trends coming through in our analysts’ numerical forecasts, too. Every month, we aggregate their forecasts for individual companies’ key corporate indicators into regional and global figures, which cover a rolling three-year period. This proprietary Global Aggregates data, built from the firm-level up, shows that the days of drastic capital spending cuts may now be over, with growing spending in the US in particular, setting up a potential recovery in productivity.

Analysts expect rising US investment in 2017/18, led by energy

Global Aggregates capex growth estimates for US sectors (USD)

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Shareholders to benefit further

The strong corporate focus on shareholder-friendly activities that we have seen in recent years shows little sign of abating. Indeed, with increasing demand growth and rising returns on capital, it is not surprising that a majority of developed markets analysts are expecting further dividend growth while emerging markets analysts are leaning towards stable dividends. Remarkably, not a single developed markets analyst predicts dividend cuts for their sector as a whole.

A majority of analysts everywhere see continuing M&A activity. Demand growth, recovering returns and dividend confidence, in combination with contained funding costs, also make it likely that share buyback programmes will remain popular, particularly in the US.

Dividend strength continues

What is the likely dividend payment to final investors (in absolute terms) of your companies in the next 12 months?

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‘Remarkably, not a single developed markets analyst predicts dividend cuts for their sector as a whole.”

Inflationary signals strengthen, but only by a little

Roughly half of developed market analysts think their sectors are in mature stages of expansion. Traditionally, this would be a time of rising pricing pressures and stretched balance sheets, but our analysts see only limited evidence of such trends.

The number of analysts who see rising cost prices has grown; from one-third last year they now make up half of all analysts. This trend is strongest in industrials, energy, consumer staples and utilities, and among the regions, in the US and China. In industrials and consumer staples, a third of analysts warn that rising cost prices will eat into profit margins. But overall, most analysts who expect rising cost prices think these will be contained by pricing power, especially in the US – although this could mean the burden on the consumer increases, an important signal for policymakers.

Pricing power offsets increasing cost prices

To what extent will input cost inflation be a problem for your companies over the next 24 months versus the last 24 months?

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A similar picture characterises the outlook for wages, which are generally seen as stable (35%) or increasing moderately (59%). This shows a modest inflationary shift compared to last year when some analysts were even predicting wage cuts in their sectors. This trend is evident in all regions except China, where expectations for wage inflation have eased from last year. US analysts are most likely to see wage price inflation. Similarly, a majority of analysts by sector expect wage growth for the companies they cover, except in financials and utilities. Interestingly, fewer IT and healthcare analysts see strong wage growth than last year.

Access the full 42-page Fidelity Analyst Survey here.

Fidelity International

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