Management confidence among the largest companies in Asia ex-Japan has reached its highest level since 2014, turning from negative last year to positive this year, according to the Fidelity Analyst Survey 2017.
The survey found that the Global Sentiment Indicator, based on five key components of corporate health, has moved firmly back into ‘warming’ territory.
With cyclical forces evident across all regions and sectors, chief executive officers now regard demand-led growth as the main driver of earnings growth for their companies, whereas last year they were looking to maximize cost efficiencies.
The improvement in sentiment was particularly strong in Asia Pacific ex-Japan and China, where the scores moved from 5.0 to 5.7 and from 4.1 to 5.7 respectively.
“China and India stand out in this year’s survey,” comments Catherine Yeung, Investment Director at Fidelity International.
“After two years of soft readings, our analysts’ renewed confidence in China, due to improving capital returns and balance sheet strength in particular, reveals that fears on the ground of a hard landing have receded considerably.”
China is also the region where analysts expect the least expansion in headcount over the next year. This shows that China is climbing the value chain towards higher-quality growth that embraces higher levels of automation.
“India experienced a severe monetary shock in 2016 after the withdrawal of some bank note denominations from the physical money supply. However, this should strengthen the fight against corruption and broaden the tax base.
“Additionally, India has a long-term sustainable economic growth rate around 6% or 7%, according to our analysts, driven by positive structural growth factors such as a younger population, and greater scope to grow per capita income and investment levels than other emerging markets,” says Yeung.
Heightened disruption in the consumer sector
Perhaps surprisingly, consumer discretionary companies, which usually benefit from any cyclical upswing, scored the lowest on this year’s sentiment indicator.
Analyst sentiment is only very slightly tilted toward improving conditions over the year against the backdrop of declining management confidence, capex and returns on capital.
Yeung comments: “This reflects the fact that risks to incumbents from waves of industry-led and consumer-led disruption are significant. Spending continues to shift from offline to online everywhere, disrupting existing business models, intensifying competition and squeezing profit margins."
IT, on the other hand, looks to be the biggest winner from this trend with Fidelity’s analysts expecting stable or rising IT spending across all sectors and regions. More than half of all IT analysts report management confidence is strengthening, feeding through into rising capital expenditure, increasing returns on capital and higher dividend payments this year.
Yeung adds: “Technology’s position is unique. It is the disruptor for all other sectors, but the sector itself is not disrupted by those other industries. While certain consumer markets such as smartphones are relatively mature, there is still considerable scope for IT to penetrate other sectors such as industry and agriculture.”
However, while Fidelity’s analysts are more bullish about the outlook for their sectors than in previous years, they do warn of some material risks, highlighting the possibility that oil prices slide again or that demand growth disappoints.
The survey also reveals a modest increase in inflationary pressures. A faster pick-up in inflation - largely in the US and the UK - could lead to tighter financial conditions globally, which could hurt many companies.
Yeung continues: “All investment views carry risks - while our ‘base case’ analyst outlook is clearly positive, it is the job of our analysts to continuously adapt and re-test their investment theses when there are meaningful changes in the environment. So, for instance, while there is modest optimism over oil prices, it is mitigated by the knowledge that larger-than-expected oil supply growth or weakness in economic demand could lead to renewed falls, which would undermine conditions in a range of sectors.
“Encouragingly, there are few signs that political risk is genuinely holding companies back. Our analysts are not oblivious to the many political challenges that face the world, but generally they do not see these weighing on company investment decisions, with the noted exception of Brexit.”