24 March 2019
Fidelity's Gregor Carle doesn't think a credit crisis will happen in China given the strong liquidity support from the government. Photo: HKEJ
Fidelity's Gregor Carle doesn't think a credit crisis will happen in China given the strong liquidity support from the government. Photo: HKEJ

US seen as standout economy in Fidelity survey

Corporate confidence and fundamentals favor developed over emerging markets, with the United States widely regarded as the standout economy, according to the latest analyst survey of Fidelity Worldwide Investment.

Around 43 percent of the companies covered by the analysts are more confident or a lot more confident about the year ahead compared with 2013, reflecting the strength of the recovery, a return to “fundamentals” after a period of protracted uncertainty and management caution.

Analysts covering developed markets are more confident than analysts covering emerging markets, and analysts covering financial, industrial and consumer discretionary stocks are the most confident about management investing in their businesses.

The survey, covering 128 Fidelity analysts based in Europe and Asia, also found that company management are expected to maintain their capital expenditure plans (43 percent) or moderately increase them (36 percent). As a result of this cautious optimism, companies are starting to spend some of the cash sitting on balance sheets with the focus on shareholder-friendly activity, bolt-on mergers and acquisitions and increases in dividend payments rather than aggressive capex growth.

There was a more positive response in the US and Europe relative to Asia, reflecting some of the current headwinds facing the region’s emerging economies amid tapering of the US quantitative easing program. However, Japan is the only place where companies are expected to put their capex focus heavily on growth.

Commenting on the findings of the latest analyst survey, Leon Tucker, Asia-Pacific head of equity research at Fidelity Worldwide Investment, said: “This year’s survey suggests company management teams are more confident in their businesses and put their focus back to capital allocation. We expect market leadership to refocus on quality franchises, particularly those in the intellectual property sectors, such as pharmaceuticals and technology.

“We believe that the equity market will revert to rewarding the best allocators of capital that creates shareholder value. Instead of risk-on, risk-off sentiment caused by macroeconomic factors, fundamental stock-specific drivers are likely to explain a larger part of investment returns. Bottom-up research process is critical to identify long-term winners with strong fundamentals in today’s environment.”

From a fixed income perspective, the credit cycle is maturing as leverage creeps higher and valuations tighten. Event risk will be the dominant theme for credit investors over the next 12 months, which creates both winners and losers in the bond market.

Gregor Carle, investment director of fixed income at Fidelity, said: “Although there is a deterioration of balance sheet fundamentals, only 26 percent of our analysts surveyed reported balance sheets as being stretched. In our survey, China comes out as a key geography in terms of having weaker balance sheets, consistent with reported signs of credit expansion in the economy. However, we don’t think a credit crisis will happen in China given the strong liquidity support from the government.”

The Fidelity Analyst Survey is run annually and presents a temperature check of corporate confidence and identifies some of the long-term investment themes expected to shape the global economy and investment markets in the years ahead. The survey garnered responses from 128 analysts based in Europe and Asia and provides a rare insight into Fidelity’s fundamental investment process.

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