a micro view on macro divergence

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a micro view on macro divergence
FIDELITY
ANALYST
SURVEY
2015
A MICRO VIEW
ON MACRO
DIVERGENCE
REGIONAL VIEW
GLOBAL SENTIMENT SCORE
2015 – 5.7
2014 – 6.4
Global sentiment score is a composite
of the 5 key indicators detailed below
DEVELOPED STILL
BEATS EMERGING…
0
10
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.
1
2
9
8
Fidelity analysts
conduct
17,000
3
7
company meetings
per year
4
6
5
4.3
4.4
LATIN AMERICA/EMEA
CHINA
Mixed outlook makes
discrimination critical
Growth is slowing,
but from a
rapid pace
5.3
ASIA PACIFIC
(EX JAPAN & CHINA)
Reform will be
the focus
5.6
1
10
meeting every
minutes
5.8
US
EUROPE
Recovery is maturing,
still looking strong
Moving into
recovery with strong
corporate renewal
7.1
JAPAN
‘Abenomics’ is
boosting confidence
and expected returns
10
9
8
7
6
5
4
3
2
1
0
EMERGING
KEY INDICATORS:
CAPEX
INDUSTRY RETURNS
DEVELOPED
MANAGEMENT CONFIDENCE
BALANCE SHEET STRENGTH
DIVIDEND POLICY COMPOSITE = 2015 SCORE
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.
2
A micro view on macro divergence
SECTOR VIEW
GLOBAL SENTIMENT SCORE
5.7
Global sentiment score is a composite
of the 5 key indicators detailed below
SECTOR FUNDAMENTALS
MOVING APART
0
10
Survey responses were considerably more diverse than
last year, but dividend expectations remain supportive
for all regions and sectors except energy.
1
9
2
8
3
7
4
6
5
ENERGY
Loses out in all areas
from the lower oil price
ENERGY
MATERIALS
UTILITIES
Considerable balance
sheet repairs, but coal
and gas prices a risk
CONSUMER
DISCRETIONARY
UTILITIES
STAPLES
Much loved by investors
seeking a stable income
CONSUMER
STAPLES
IT
IT
High levels of
disruption make stock
selection critical
TELECOMS
INDUSTRIALS
HEALTHCARE
Comes out on top, driven by
innovation and supported
by structural factors
FINANCIALS
HEALTHCARE
10
9
8
7
6
5.6
5.9
6.2
6.2
6.4
6.4
6.8
5.0
5
4
3.8
3
2
2.1
1
0
KEY INDICATORS:
CAPEX
INDUSTRY RETURNS
MANAGEMENT CONFIDENCE
BALANCE SHEET STRENGTH
DIVIDEND POLICY
COMP. 2015 SCORE
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.
Fidelity Analyst Survey 2015
3
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
CONTENTS
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
4. WHAT ARE THE RISKS?
30
32
5. 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:
Current analyst positioning
ABOUT FIDELITY
4
A micro view on macro divergence
Scan the QR codes throughout the document to
hear our analysts explain the findings on video
40
41
17,000 MEETINGS
HELD EVERY YEAR
1 MEETING EVERY
10 MINUTES
122 RESPONSES
(EQUITY)
37 RESPONSES
(FIXED INCOME)
EXECUTIVE
SUMMARY
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.
Fidelity Analyst Survey 2015
5
“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.”
Henk-Jan Rikkerink, Head of Equity Research – Europe, US, EMEA & Latin America
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
hours of in-house analysis by our analysts, covering all
industries and all regions of the world. In a sea of
top-down surveys, it offers a genuinely ‘bottom-up’
picture of the outlook for the corporate sector, derived
from our analysts’ direct conversations with CEOs, CFOs,
and division heads of the companies they cover.
6
A micro view on macro divergence
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
to our analysts’ scenarios which converge on
macroeconomic concerns (part 4) and conclude
by reflecting on the value of this type of research,
highlighting last year’s accurate predictions and the
value added by our proprietary analysis (part 5).
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.
“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’.”
Leon Tucker, Head of Research – Asia Pacific
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.
Fidelity Analyst Survey 2015
7
“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.”
Martin Dropkin, Head of Credit Research
IT PAYS TO BE SELECTIVE
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.
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.
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
current levels, partly owing to higher funding costs.
This warrants closer inspection for investors, as
emerging market corporate high yield issuance has
been high, and a relatively high share of energy
firms will need to raise capital this year.
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.
In building bond portfolios, an active, fundamental
approach to security selection, the ability to
disaggregate risks and a focus on diversification
and flexibility can provide investors with a toolkit for
avoiding blow-ups while generating attractive income.
THE ERA OF CHEAP
FUNDING CONTINUES
8
A micro view on macro divergence
1. DEVELOPED MARKETS
MORE PROMISING
THAN EMERGING MARKETS
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.
Fidelity Analyst Survey 2015
9
MATURING BUT
CONTINUED RECOVERY
0
10
US
1
9
2
8
5.6
3
4
7
6
5
KEY SURVEY FINDINGS
SUPPORTIVE FACTORS
AFTER A STRONG 2014
ANALYSTS EXPECT
STABILITY IN…
MANAGEMENT
CONFIDENCE
DIVIDEND
PAYOUTS
LOW OIL PRICE
DEMAND GROWTH
CONTINUING
$600
a year ‘TAX CREDIT’
for consumers
%
HEALTHY…
Profit Margins
RETURN ON CAPITAL
Cash Balances
CONTINUING M&A
?
47%
2013
LOW UNEMPLOYMENT
2014
2015
Source: Reuters Jan 2015
OUTLOOK FOR OIL PRICE
/ US SHALE
10
A micro view on macro divergence
WHAT TO WATCH
DEMAND SLOWDOWN
CHINA HARD LANDING
VALUATIONS
RISING
INTEREST RATES
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).
GLOB
A
NTIMENT S
L SE
E
COR
THE US RECOVERY IS
MATURING, BUT THE OUTLOOK
REMAINS SUPPORTIVE
5.6
US management confidence
still rising in most sectors
A lot more
confidence
2
1.5
More
confidence
1
0.5
About
the same
0
-0.5
Less
confidence
-1
-1.5
Utilities
Industrials
Healthcare
Financials
Telecoms
Consumer Discretionary
IT
Materials
-2
Energy
A lot less
confidence
Consumer Staples
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.
Source: Fidelity Worldwide Investment, Analyst Survey 2015
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.
Fidelity Analyst Survey 2015
11
MOVING INTO
RECOVERY
0
10
EUROPE
1
9
2
8
5.8
3
7
4
6
5
KEY SURVEY FINDINGS
EUROPE
COMES
SECOND
ON…
BALANCE SHEET
STRENGTH
SUPPORTIVE FACTORS
M&A
STRENGTHENING DEMAND
CORPORATE RESTRUCTURING
M&A
RETURN
ON CAPITAL
WEAKER EURO
LOW OIL PRICE WINNER
67%
Net oil
importer
of analysts think
balance sheets
are healthier
BENEFITS FROM
WEAK EURO
Benefits
exporters
MANAGEMENT
CONFIDENCE
ECB QE
€1.1
TRILLION
BALANCE
SHEET
EXPANSION
Analyst views diverging…
More “+”
Less “–”
Rate of €60bn
per month
Same “=”
WHAT TO WATCH
DEFLATION
12
A micro view on macro divergence
POLITICAL RISKS
OIL PRICE OUTLOOK
SUCCESS OF QE
GLOB
A
NTIMENT S
L SE
5.8
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.
20%
0%
-20%
-40%
Business loan demand
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
-60%
Mergers on credit
Source: ECB Bank Lending Survey Jan 2015
Europe’s relative underperformance
to US at a 38-year record
1.8
1.6
1.4
1.2
1
0.8
2015
2010
2005
2000
1995
1990
1985
1980
1975
0.6
1970
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 lowerquality equities. Moreover, European stocks now look
attractively valued versus the US, with the relative
divergence between the two markets at a 38-year low.
40%
Overall % change, past 3m
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.
Loan demand for corporate
restructuring has increased
MSCI Europe ($)/MSCI USA ($) ratio
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.
E
COR
CORPORATE RENEWAL IN
EUROPE IN ANTICIPATION
OF DEMAND RECOVERY
Source: MSCI, DataStream Jan 2015
Fidelity Analyst Survey 2015
13
‘ABENOMICS’
DRIVING OPTIMISM
0
10
JAPAN
1
9
2
3
7
4
5
6
KEY SURVEY FINDINGS
SUPPORTIVE FACTORS
JAPAN CAPEX
SCORES
TOP ON…
MANAGEMENT
CONFIDENCE
8
7.1
‘ABENOMICS’ 3RD ARROW
STRUCTURAL
REFORMS
PAYOUTS
POLICY
WAGE GROWTH
Analysts expect payouts to be…
Reduced
5%
Increased
75%
RETURN
ON CAPITAL
Maintained
20%
BALANCE SHEET
STRENGTH
OF ANALYSTS
EXPECT HIGHER
WAGE COST
INFLATION
75%
Expect increasing
Return on Capital
85%
Think balance sheets now
are healthier than 2014
ON A PICK-UP IN…
1. CONSUMER PRICES
2. FULL TIME
EMPLOYMENT
3. HIRING DEMAND
LOW OIL PRICE WINNER
90%
of energy
used in
Japan is
imported
WHAT TO WATCH
STALLING WAGE GROWTH
14
A micro view on macro divergence
YEN STRENGTH
CHINA SLOWDOWN
DEMAND SLOWDOWN
GLOB
A
NTIMENT S
L SE
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.
E
COR
JAPAN: ‘ABENOMICS’ GETS
THE BENEFIT OF THE DOUBT
7.1
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).
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.
20
15
10
1
0
USA
World
Europe
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
-5
2005
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.
75% of analysts expect Japanese
ROEs to continue improving
MSCI Return on Equity %
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.
Japan
Source: MSCI, DataStream 25.02.2015
The virtuous cycle
Abenomics
Wage
increases,
higher
bonuses
driven by
performance
Raised growth &
inflation expectations,
improved sentiment
Growth
strategy
Balanced
Budget
Yen depreciation
Inflation
Source: Fidelity Worldwide Investment 2014
Fidelity Analyst Survey 2015
15
CAUTION AMID
THE SLOWDOWN
0
10
CHINA
1
9
2
8
4.4
3
7
4
5
KEY SURVEY FINDINGS
STABLE ON…
MIXED MACRO FACTORS
MANAGEMENT CONFIDENCE
M&A
6
LOWER OIL PRICE
SUPPORTIVE
INDUSTRY RESTRUCTURING
/ MARKET CONSOLIDATION
$100bn
Estimated
saving
Stabilised
DIVIDEND PAYOUTS
EXPECT
DIVIDENDS
TO BE
MAINTAINED
WEAK ON…
CAPEX
RETURN ON CAPITAL
TRANSITION TO A
CONSUMER LED ECONOMY
EMPHASIS ON
COST CUTTING
DEMAND GROWTH
SLOWING
LACK OF
PRICING POWER?
69%
Expect Lower
Returns on
Capital
Analysts expect
declining Capex
WHAT TO WATCH
DEMAND SLOWDOWN
7.4%
GDP
growth
2014
16
A micro view on macro divergence
CREDIT RISK
PROPERTY/FINANCIAL DEFAULTS
DEFLATION
GLOB
A
NTIMENT S
L SE
4.4
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.
E
COR
CHINA: CAUTION
AMID THE SLOWDOWN
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.
Chinese returns declining,
pushed down by slowing demand
100%
18.8%
90%
80%
Increasing
Reasons for
declining returns
12.5%
Stable
70%
60%
68.8%
Declining
18%
50%
40%
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.
55%
18%
30%
20%
9%
10%
0%
Costs increasing
Lack of pricing power
Competition
Slowing demand
Source: Fidelity Worldwide Investment, Analyst Survey 2015
Fidelity Analyst Survey 2015
17
EMERGING MARKETS:
OVERALL CONCERNS MASK
DIVERGING FORTUNES
E
COR
GLOB
A
NTIMENT S
L SE
4.3
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.
E
COR
GLOB
A
NTIMENT S
L SE
5.3
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.
Source: Fidelity Worldwide Investment, Analyst Survey 2015
18
A micro view on macro divergence
EMEA/Latin Am
1
Europe
Low
Japan
2
Asia Pacific
Moderate
(Exc China & Japan)
3
China
High
US
EMEA/Latin America have the highest
exposure to currency fluctuations
2. DIVERGING
OPPORTUNITIES
ARE PUSHING
SECTORS APART
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.
Fidelity Analyst Survey 2015
19
WEAKEST SECTOR
0
10
ENERGY
1
9
2.1
2
8
3
7
4
KEY SURVEY FINDINGS
BOTTOM IN OUTLOOK FOR…
MANAGEMENT
CONFIDENCE
85%
of analysts report
significantly less confidence
RETURN ON CAPITAL
92%
of analysts
expect a decline
PAYOUTS POLICY
CAPEX
5
6
DRIVING DIVERGENCE BETWEEN…
REGIONS…
LOSERS
WINNERS
NET OIL EXPORTERS
NET OIL IMPORTERS
100%
all analysts
expect reduction
e.g. Russia
e.g. India
HIGH COST PRODUCERS
DEFAULT RATES
ALL CONSUMERS
Countries with
LOW FUEL TAX
or
of analysts
expect default rates
to increase
BALANCE SHEET HEALTH
HIGH ENERGY
SPENDING
e.g. US Shale
LOSERS
SECTORS…
WINNERS
E&P & OIL EQUIPMENT
CONSUMER DEPENDENT
LOWER
INPUT
COSTS
FOR ALL
SECTORS
e.g Airlines
WHAT TO WATCH
OIL PRICE
20
A micro view on macro divergence
OPEC STRATEGY
DEFAULT RISKS
TACTICAL VALUATION
OPPORTUNITIES
STRONGEST SECTOR
0
10
HEALTHCARE
1
9
2
8
6.8
3
7
4
KEY SURVEY FINDINGS
5
6
A GOLDEN AGE FOR HEALTHCARE
HEALTHCARE
SCORES TOP ON…
PAYOUTS POLICY
INNOVATION
ONCOLOGY
IMMUNOTHERAPY
VIROTHERAPY
GENE THERAPY
RETURN ON CAPITAL
Analysts expect payouts to be…
60%
Increased
50%
Maintained
50%
POPULATION AGEING
EMERGING MARKET
CONSUMER
STRUCTURAL GROWTH
IN GLOBAL HEALTHCARE
Expect an
increase
HEALTHCARE
COMES SECOND ON…
M&A
POPULATION GROWTH
MANAGEMENT CONFIDENCE
WHAT TO WATCH
MAJOR M&A
REGULATION (E.G. OBAMACARE) PRICING POWER
DISRUPTIVE TECHNOLOGY
Fidelity Analyst Survey 2015
21
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.”
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
background of lagging demand growth and very low
borrowing costs, M&A plans remain on the table as
a sensible way to boost growth (only 15% of analysts
see no M&A at all), especially in European markets.
However, analysts think M&A will be moderate rather
than large-scale, as indicated by a clear tilt towards
bolt-on acquisitions.
22
A micro view on macro divergence
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.”
James Dudgeon, Equity Research Analyst
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.
Energy is a large share of global
non-financial corporate capex
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.
32%
58%
10%
Energy
Materials
Other sectors
Source: S&P Global Corporate Capital Expenditure Survey 2014,
S&P Capital IQ, S&P Ratings’ calculations, IMF (July 2014 estimate)
S&P 500 capex expected to fall 3% in 2015,
pushed down by a 25% drop in energy capex
800
700
-3%
600
Capex ($bn)
500
67%
400
300
200
100
-25%
33%
Energy
2015
0%
2014
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.
Other sectors
Source: Goldman Sachs Global Investment Research 29 January 2015
Winners and losers from lower oil prices
15%
Biggest winners
10%
1. North America Rotary Rig Count, Baker Hughes, 11.02.2015
Thailand
Net Oil Imports, % GDP
India
Rep. of Korea
Turkey
Greece
5%
0%
2%
South Africa
Japan
Spain
Philippines Chile
China
Italy USA
Germany
Sweden
United Kingdom France
Indonesia
Brazil
4%
6%
8%
10%
Canada
Mexico
-5%
-10%
12%
14%
Poland Hungary
Czech Rep.
16%
18%
Energy CPI Weight
Biggest losers
Colombia
Russian Federation
Norway
Source: Fidelity Worldwide Investment, Fidelity Solutions Group, December 2014
Fidelity Analyst Survey 2015
23
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.
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.
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.
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.
FDA new drug approvals reached a peak in
2014 only surpassed once before (in 1996)
60
New Molecular Entities approved
50
40
30
20
10
24
A micro view on macro divergence
2014
2004
1994
1984
1974
1964
1954
0
TELECOMS: CONFIDENCE
TO DRIVE M&A
“100% OF ANALYSTS
COVERING THE
TELECOMS SECTOR
NT
REPORTED MANAGEME
OR
LLY
UA
TO BE EQ
AN
MORE CONFIDENT TH
R
HE
HIG
LAST YEAR, A
Y
AN
AN
LEVEL TH
OTHER SECTOR.”
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.
Telecoms
0
Healthcare
Not at all
Industrials
1
Utilities
Moderate
amount
Con. Staples
2
IT
To a large
extent
Materials
3
Financials
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.
Huge
strategic
priority
Con. Disc.
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.
Telecoms is the sector focusing
most on M&A in the next 1-2 years
Energy
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.
Source: Fidelity Worldwide Investment, Analyst Survey 2015
Fidelity Analyst Survey 2015
25
Analysts expect low oil prices to have a
positive impact on consumer sectors
Major
positive
CONSUMER SECTORS: OIL
PRICES SUPPORTIVE IN A
COMPETITIVE CLIMATE, BUT
STAPLES UPSIDE LIMITED
Positive
No impact
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.
Con. Staples
Con. Disc.
Telecoms
Industrials
Healthcare
IT
Financials
Utilities
Materials
Major
negative
Energy
Negative
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.
Search for yield leads to staples sector
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
2015
2010
2005
2000
1995
0%
Staples sector earnings yield
10-year govt bond yield (avg of Germany, France, UK and US)
Source: Company reports, Fidelity Worldwide Investment Credit Research 2015
Utilities stocks at risk from falling gas prices
14
170
12
160
150
10
140
8
130
6
120
110
4
100
2
90
0
MSCI World Utilities $ (LHS)
2015
2014
Natural Gas, Henry Hub $/MMBTU (RHS)
Source: MSCI, Thomson Reuters February 2015
26
2013
2012
2011
2010
2009
2008
80
A micro view on macro divergence
“LOWER OIL PRICES COULD HAVE A
VERY POSITIVE IMPACT THROUGH
REDUCED LOGISTICS COSTS
ACROSS THE SUPPLY CHAIN.”
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
orders placed over the coming 6-9 months). Indeed,
early cyclical consumer stocks like hotels, where
valuations tend to peak first on recovering demand,
are now starting to look expensive as investors are
shifting towards stocks with lagging recovery paths.
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.
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.
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
Fidelity Analyst Survey 2015
27
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%
4.4%
4.3% 4.3%
4.3%
4.0%
4%
3.4%
3%
2%
1%
Oct ‘14 Survey
Oct ‘15 Survey
Source: CIO Surveys, Morgan Stanley Research
28
A micro view on macro divergence
Overall
US
EU
0%
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.
3. INCOME: CHEAP
FUNDING FOR LONGER,
HEALTHY DIVIDEND
OUTLOOK
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.
Fidelity Analyst Survey 2015
29
LOWER FOR
LONGER
Analysts expect dividend payouts to
be very strong, especially in Japan
100%
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.
90%
80%
70%
60%
75%
50%
40%
30%
20%
10%
Plan to maintain payout
Japan
US
Asia Pacific
ex Japan and Chin
Europe
EMEA/Lat Am
China
0%
Plan to increase payouts
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.
Source: Fidelity Worldwide Investment, Analyst Survey 2015
Dividend yields expected to rise
across all sectors and regions
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%
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%
Source: Fidelity Worldwide Investment Global Aggregates Report February 2015
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.
“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
TRANSITION AND SLOWS DOWN, WINNERS
AND LOSERS WILL EMERGE, CREATING
MORE OPPORTUNITIES TO DIFFERENTIATE
FOR INVESTORS.”
Olivier Szwarcberg, Head of Asian Fixed Income
30
A micro view on macro divergence
Energy
Materials
Financials
Con. Disc.
-1
IT
Decrease
Con. Staples
0
Healthcare
Same
Telecoms
1
Industrials
Increase
Utilities
Rising funding costs put pressure on
materials and energy sectors
Source: Fidelity Worldwide Investment, Analyst Survey 2015
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.
Regions vary in their position
within the credit cycle
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.
Source: Fidelity Worldwide Investment February 2015
Fidelity Analyst Survey 2015
31
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
leading to overcapacity.
32
A micro view on macro divergence
MACRO
COMPETITION
JAPAN
COST
REGULATION
POLITICAL
CONSUMER
CAPEX
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.
PRICES
RATE EUROPE
PRICING
US
CHINA
OIL
GLOBAL
GROWTH CYCLE
DEMAND FX
SECTOR
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.
Fidelity Analyst Survey 2015
33
5. IS THERE WISDOM
IN CROWDS?
LAST YEAR’S PREDICTIONS
PROVED ACCURATE
DEMONSTRABLE ADDED VALUE
IN OUR ANALYST OPINIONS
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.
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.
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
developed over emerging markets as well as
knowledge economy sectors (like technology and
pharmaceuticals) over hard assets (like energy and
materials), and noted that the US stood out as the
strongest of all regions.
34
A micro view on macro divergence
Between them, our analysts conduct more than
17,000 company meetings every year. Put differently,
we engage with a company every 10 minutes on
any working day. Our analysts actively cover over 80%
of the world’s market capitalisation and global
investment grade credit universe at any point in time.
They also tactically cover the remainder of the
investable universe.
6%
4%
2%
1 year
US
Japan
Europe (inc. EM)
Asia ex Japan
0%
3 year (annualised)
Source: Fidelity Worldwide Investment. 31 December 2014. Equal weight.
No 3 year data available for US
Relative value-add of credit
analyst ratings – high yield
8%
6%
4%
2%
0%
-2%
-4%
Highest (1 & 2) rated companies
Jun 14
Oct 14
Feb 14
Jun 13
Oct 13
Feb 13
Oct 12
Jun 12
Feb 12
Oct 11
-6%
Jun 11
All this data is gathered in a proprietary system to
identify patterns, anomalies and inflection points which
trigger debates and encourage differentiated views
among the investment team that can be exploited in
client funds. Our Global Aggregation Research Report
covers around 2600 companies globally, representing
about 95% of the market cap of the major indices, and
focuses on 19 major data items including all the major
valuation, sales, profit and cost ratios. Three-year
forecasts are grouped into sectors and regions. This
database quantifies and aggregates the analysts’
individual opinions and gives us an almost unparalleled
insight into sectors and regions.
8%
Feb 11
Our analysts work together across regions, sectors
and asset classes under a single integrated research
platform, which allows significant benefits of scale
and the ability to analyse more stocks in more depth.
For example, the relevant equity and credit analysts
will often attend a meeting with a company CFO
together – each looking through a different lens,
applying their different expertise and analyses.
Relative value-add of equity analyst ratings
Oct 10
“IT IS ABOUT HAVING THE DEPTH
AND BREADTH OF RESEARCH
THAT ALLOWS US TO JOIN THE
DOTS AND SPOT OPPORTUNITIES
OTHERS MAY MISS.”
Henk-Jan Rikkerink, Head of Equity Research – Europe, US,
EMEA & Latin America
Value added relative to index
While our portfolio managers are responsible and
accountable for making investment decisions for client
funds, analysts are responsible for making individual
security recommendations. The performance of these
stock picks is tracked and analyst compensation is
partly benchmarked against it. In investment markets
increasingly preoccupied with the short term, there is
value in taking a longer-term view than the market. The
fundamental investment views taken by our analysts are
not driven by short-term thinking, but are instead
typically based on a 3-5 year time horizon. Their insights
as to whether a company is worth investing in may
therefore differ starkly from current market sentiment.
High yield performance relative to sector
It’s not just company meetings. Our analysts also
speak to companies’ customers, competitors, and
suppliers, and regularly commission specific research
from specialists such as medical professionals,
engineering and technical experts. This allows them
to form high-conviction investment views on the basis
of a detailed understanding of industry dynamics.
“OUR ANALYSTS HAVE THEIR EARS
TO THE GROUND. THEY HEAR WHAT
IS GOING ON DIRECTLY FROM
SENIOR COMPANY EXECUTIVES –
LONG BEFORE THIS SHOWS UP
IN OFFICIAL DATA. ON THIS
INVALUABLE INSIGHT WE BUILD
OUR COMPANY AND INDUSTRY
ANALYSIS, WHICH HELPS US
TO OUTPERFORM THE MARKET.”
Lowest (4 & 5) rated companies
Source: Fidelity Worldwide Investment. March 2015. Performance is High
Yield cumulative DTS adjusted performance relative to sector
Fidelity Analyst Survey 2015
35
“AT FIDELITY, WE EMBRACE AND VALUE DIVERSITY
OF OPINION. OUR ANALYSTS ARE IN A UNIQUE
POSITION TO GAIN INSIGHTS INTO SOME OF THE
WORLD’S LEADING COMPANIES, ABOUT THEIR
PLANS FOR THE FUTURE, THEIR PERSPECTIVE
ON CURRENT TRENDS, AND THEIR INTENTIONS
TOWARDS BUSINESS INVESTMENT AND EXPANSION.”
It comes as no surprise that our portfolio managers’
positioning is largely consistent with analysts’
recommendations (see appendix 2). And the
analysts’ value-addition is also quantifiable; our
research recommendations have consistently
outperformed the relevant stock indices for each
of the major global regions over the past three years.
This value-addition relies heavily on the quality and
calibre of our analysts. They must be strong and
independent thinkers, show a commitment to
unearthing new and exciting investment opportunities,
and work as a team with our portfolio managers to
recommend stocks to buy and sell at the right time,
and at the right value. While analysts may promote
their stock recommendations internally, there is no
‘house view’ and there are no house-wide ‘buy’ and
‘sell’ lists imposed on our portfolio managers; rather
they are afforded flexibility to manage their portfolios in
their own individual styles. A heatmap of our current
analyst positioning has been included in the appendix.
36
A micro view on macro divergence
We also strive to gain an in-depth understanding of the
relevant Environmental, Social and Governance (ESG)
issues applicable to our investments and to identify
these issues before they escalate into events that may
potentially threaten the value of our investment. We
encourage integration of ESG issues into our investment
decision-making process when it has a material impact
on the investment or it has the potential to affect the
long-term value of the investment.
APPENDIX 1:
THE RESULTS IN FULL
Fidelity Analyst Survey 2015
37
1. Are you an equity or a fixed
income analyst?
Equity (122)
Fixed Income (37)
2. Are you based in Europe or Asia?
Europe (84)
Asia (75)
3. What region do you cover?
Europe (42)
US (30)
China (17)
Asia Pacific excluding Japan
and China (38)
Japan (20)
EMEA/Latin America (12)
4. What industry sector are your
companies in?
Energy (13)
Materials (16)
Industrials (25)
Consumer Discretionary (19)
Consumer Staples (13)
Healthcare (10)
Financials (30)
Information Technology (16)
Telecoms (7)
Utilities (10)
5. What is the confidence level of the
management teams in your industry
sector to invest in their businesses
versus 12 months ago?
A lot more confident (2)
More confident (46)
About the same (60)
Less confident (36)
A lot less confident (15)
6. How do organic capex plans
for your companies over the next
12 months vary vs. last 12 months?
Significant reduction (19)
Moderate reduction (43)
About the same (53)
Moderate increase (43)
Substantial increase (1)
7. Give a percentage split of capex
between growth and maintenance
for the next 12 months.
Growth: (averaged response 43%)
Maintenance: (averaged response 57%)
8. How does this split of capex
compare to the previous 12 months?
More focus on growth (27)
More focus on maintenance (60)
Same as before (72)
38
A micro view on macro divergence
9. How will working capital
requirements change in the next
12 months for your companies?
Increase (37)
Same (94)
Decrease (28)
10. What is the likely dividend policy
of your companies in the next
12 months?
Plan to increase payout (58)
Plan to maintain payout (86)
Plan to reduce payout (10)
No dividend (5)
11. To what extent are your companies
focusing on M&A activity to achieve
growth in the next 1-2 years?
Not at all (23)
Moderate amount (97)
To a large extent (29)
M&A activity is a huge strategic
priority (10)
12. Where you are seeing M&A,
what type of M&A is it mostly?
Major strategic M&A (33)
Bolt-on acquisition (73)
Tax-driven M&A (0)
New markets directed (20)
New products directed (10)
13. What stage of the cycle is
your industry currently in?
Recovery (28)
Expansion (46)
Slowdown (37)
Recession (23)
Stable (e.g. Telecom/Utilities) (25)
14. What is the outlook for overall
returns on capital in your industry/
sector for the next 12 months versus
the last 12 months?
Better/increasing returns on capital (53)
Worse/declining returns on capital (54)
Same/stable returns on capital (52)
15. If industry returns are increasing,
what is the principal cause?
Higher/faster end demand growth (18)
Presence of pricing power (6)
Cost reduction (22)
Industry consolidation/players leaving
market/less competition (2)
Positive regulatory changes (3)
New technology/new products (2)
16. If industry returns are declining,
what is the principal cause?
Lower/slower-end demand growth (27)
Lack of pricing power (15)
Costs increasing (3)
New market entrants/more
competition (5)
Regulatory changes (1)
Disruptive technology/products (1)
17. What exposure do your companies
have to currency volatility?
Low exposure (63)
Moderate exposure (56)
High exposure (34)
Very high exposure (6)
18. On a scale of 1 to 5, where do you
think your industry/sector is today
versus your idea of fair value?
Relative to other sectors
1 – undervalued (6)
2 – (34)
3 – fair value (33)
4 – (23)
5 – expensive (5)
Versus History
1 – undervalued (7)
2 – (26)
3 – fair value (24)
4 – (31)
5 – expensive (13)
19. What do the CEOs in your
industry sector see as the main
source of earnings growth for
their companies?
Market growth/end-demand growth (68)
Market share growth (23)
Cost reduction/efficiency (42)
New markets/new products (26)
20. To what extent will input cost
inflation be a problem for your
companies over the next 24 months
versus the last 24 months?
Not a problem as no rises are
expected (86)
Not a problem, rises expected
but offset by pricing power (47)
This will be a problem, rises expected
and there is no pricing power (26)
21. What impact will energy prices
have on the profit margins of your
companies in the next 3 years?
Major negative impact (14)
Moderate negative impact (26)
No impact (41)
Positive impact (71)
Major positive impact (7)
22. What is the industry outlook for
wage cost inflation over the next
12 months versus last 12 months?
Strong increase (3)
Moderate increase (91)
No change (43)
Reduction (16)
Strong reduction (6)
29. If an increase in funding costs is
expected, how are your companies
dealing with this greater cost
of funding?
Reliance on traditional bank funding
at higher rates (18)
Increased use of bond issuance (13)
Increased use of equity issuance (9)
36. What impact will an ageing
population have on your
companies in the next 10 years?
Major negative impact (9)
Moderate negative impact (46)
No impact (56)
Positive impact (34)
Major positive impact (14)
23. Are your companies planning an
increase or reduction in marketing
spend over the next 12 months?
Significant reduction (0)
Moderate reduction (14)
About the same (121)
Moderate increase (23)
Substantial increase (1)
30. What do you expect to happen to
default rates in your industry sector
compared with last year?
Fall (24)
Stay the same (90)
Rise slightly (37)
Rise significantly (8)
37. What is the biggest risk factor
to the fundamentals of your
industry/sector?
See word cloud on page 33
24. Are your companies planning
an increase or reduction in IT
spend over the next 12 months?
Significant reduction (0)
Moderate reduction (12)
About the same (108)
Moderate increase (35)
Substantial increase (4)
25. How strong, on average, are
balance sheets for the companies
you cover now compared with
3 years ago?
Considerably weaker (7)
Weaker (39)
About the same (27)
Healthier (59)
Considerably healthier (27)
26. How would you characterise the
efficiency of the overall balance
sheet in your industry/sector?
Very safe and cautious (17)
Modestly cautious (55)
About right (48)
Modestly stretched (31)
Too stretched (8)
27. How do you expect companies
to approach their balance sheet
needs this year versus last year?
Less refinancing (20)
Stable – no change (116)
Higher level of refinancing (23)
28. Given divergent base rate
expectations, how will funding
costs likely change in the next 12
months for your companies based
on credit quality?
Increase (40)
Same (79)
Decrease (40)
31. What percentage of your companies
will need to raise capital in the
next 12 months, via the equity or
bond markets?
None (26)
0-25% (78)
25-50% (31)
More than 50% (24)
38. What will be the likely impact
of disruptive technological change
on your industry sector?
No impact – disruption is not
a feature (34)
Low impact – disruption is low
and gradual (67)
Moderate impact – disruption
is moderate (34)
High impact – disruption is high
and fast-moving (24)
32. How many of your companies are
planning to expand their headcount
in the next 12 months?
0-20% (97)
20-40% (16)
40-60% (21)
60-80% (14)
80-100% (11)
33. How much of an impact do you
expect regulation to have on
your industry/sector over the
next 2 years?
Significant impact (61)
Moderate impact (50)
Low impact (39)
No impact (9)
34. Regulation: where there is an
impact, is this already reflected
in valuations?
Fully reflected (49)
Only partly reflected (86)
Largely not priced in (15)
35. Within the broad area of corporate
governance, which issue is being
most scrutinised at your companies?
Financial transparency
and accounting (75)
Executive compensation (23)
Sustainability and socially responsible
investment (20)
Environmental/ethical (30)
Charitable and political donations (0)
Fraud (11)
Fidelity Analyst Survey 2015
39
APPENDIX 2:
CURRENT ANALYST
POSITIONING
Scale
Green levels mean the sector is
overweight in analysts’ ratings
and likely to outperform, red
means it is underweight and
likely to underperform.
Global Ratings Heatmap
US
Europe
APxJ
Japan
EMEA/Lat
Am
Regional Average
Consumer Discretionary
Retailing
Automobiles & Components
Media
Consumer Durables & Apparel
N/A
Consumer Services
Consumer Staples
Food Beverage & Tobacco
Food & Staples Retailing
Household & Personal Products
Energy
Energy
Financials
Banks
Insurance
Diversified Financials
Real Estate
Healthcare
N/A
Pharmaceuticals, Biotechnology
Health Care Equipment & Services
Industrials
Capital Goods
Transportation
Commercial & Professional Services
Information Technology
Materials
Software & Services
Technology Hardware & Equipment
N/A
Semiconductors & Semiconductor Equipment
N/A
Chemicals
Metals & Mining
Other Materials
Telecommunication Services
Telecommunication Services
Utilities
Utilities
Source: Fidelity Worldwide Investment Equity Research. Ratings as at 31/01/2015
40
A micro view on macro divergence
Global
ABOUT FIDELITY
Fidelity Worldwide Investment is an asset manager serving
investors in 25 countries across Asia Pacific, Europe, and Latin
America. With US$275 billion of assets under management
(AuM) and around 7,000 employees, we are one of the world’s
largest providers of investment strategies across asset classes
and retirement solutions. Investment is our only business, and our
mission is to enable our clients to achieve their financial goals
through outstanding investment solutions and service.
We were established in 1969 as the international investment arm of
Fidelity Investments, founded in 1946 in Boston. In 1980, we became
independent of the US organisation, and are today owned mainly
by management and members of the original founding family.
Fidelity Research Institute
The Fidelity Research Institute works closely with the firm’s investment and distribution teams to publish a range
of insights that are designed to stimulate client thinking and guide portfolio action. By tapping into the firm’s
fundamental research expertise and its proprietary bottom-up views, we aim to connect clients with timely
and thought-provoking insights on markets, industries and structural growth themes.
NOTES
42
A micro view on macro divergence
NOTES
Fidelity Analyst Survey 2015
43
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party
without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation
of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity
makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all
jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the
relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to
provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and
are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration
only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this
documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity
Worldwide Investment.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been
involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity Worldwide investment refers to the group of companies which form the global investment management organization that provides products and services in designated
jurisdictions outside of North America Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited. Fidelity only offers
information on products and services and does not provide investment advice based on an individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg)
S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss
Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German
institutional clients issued by FIL Investments International – Niederlassung Frankfurt on behalf of FIL Pension Management, Oakhill House, 130 Tonbridge Road, Hildenborough,
Tonbridge, Kent TN11 9DZ.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment
Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity Worldwide Investment in Singapore. FIL Asset Management (Korea) Limited is
the legal representative of Fidelity Worldwide Investment in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited 15F, 207 Tun Hwa South Road, Section 2,
Taipei 106, Taiwan, R.O.C. Customer Service Number: 0800-00-9911#2
IC15-28

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