With the oil price lows now behind us, oil-price sensitive sectors and regions are bouncing back strongly from last year’s lows. This, combined with evidence of modest demand growth and continued innovation across sectors, is driving higher levels of investment and activity, which has also been reflected in firmer macroeconomic data. 
As a result, after three years of deteriorating sentiment, our Analyst Sentiment Indicator, encompassing the views of our meetings with around 17,000 companies, and based on five key components of corporate health, has scored positively across all regions and sectors.
Perhaps one of the most prominent findings is the swing in sentiment in the ‘old economy’ sectors that did so poorly last year, particularly energy and materials. Almost all analysts of these sectors said key corporate indicators were deteriorating in 2016 but they are now optimistic for 2017.
Source: Fidelity International
Management confidence in energy and materials is significantly stronger than last year and capital spending is expected to recover. Returns on capital are widely seen to be improving with recovering pricing power in energy and faster growth in demand for materials, while leverage is generally expected to fall.
This optimism reflects the recovery last year in commodity prices, including oil, gas, iron ore, and copper, which has supported earnings growth, alongside continuing cost cutting.
Our proprietary Global Aggregates data (based on the summation of our individual company forecasts) mirrors these findings; energy analysts expect a whopping 81 per cent rise in net income globally this year, after last year’s sharp contraction (-35 per cent), with further improvement in 2018 (+22 per cent).
Materials analysts are still cautious on the outlook for mining companies, as Chinese demand for many commodities may yet soften given already high levels of fixed asset investment, peaking property markets and elevated credit levels. In addition, Chinese supply restrictions for some commodities such as coal may not be sustainable and most commodities remain in oversupply.
Oil inventories: a sleuth’s tale
While most of the market was focussed on continued increases in US oil production last year, we turned positive on the oil sector in February 2016, focusing on the drivers of global oil demand and supply, especially global oil inventories. Our work suggested that the industry was likely to move towards equilibrium more quickly than the market was anticipating and as the year progressed, our confidence in this ‘market rebalancing’ thesis increased as global oil inventories started to reduce.
Looking ahead, we remain confident that oil and gas prices will continue on an upward trend while the OPEC agreement remains in place, supported by shrinking excess inventories after the capacity cuts of recent years. Companies are making better-than-expected progress on readjusting their cost and capital spending levels.
But not all energy firms are out of the woods yet; the industry expects some further stress and many companies are still adjusting their cash cycles. The severity of the downturn was such that companies need to work hard to remain competitive, which helps to explains the continuing cost cuts despite the respite offered by higher commodity prices.
Moreover, the acceleration in energy capital spending is entirely driven by US shale oil and gas industries; in the rest of the world, budgets for capital spending are more or less flat for this year. Our analysts generally prefer European and US companies over emerging market energy names, many of which are still suffering from balance sheet stress.
A reversal in oil prices
Our survey results show how important oil prices still are to the global economy; the recovery in crude oil is one of the main drivers of renewed cyclical vigour that is coming through in the survey’s improved reading of corporate conditions, reversing the 2016 findings. The low oil prices of previous years didn’t only weigh on energy companies; second-order effects crippled many other industries too.
Take, for example, firms with general industrial exposure - manufacturers that sell their machinery in high volumes to other industrial firms and are quick to change direction. At first sight, such companies may seem to lack exposure to the oil price; for example, perhaps only 5% of sales are to energy companies. But 30-40 per cent of sales are to other firms that sell to oil companies. As oil prices rise, this can lead to some surprising beneficiaries; names that aren’t obvious players on oil or gas. But when oil prices fall, direct and indirect suppliers from other industries will ultimately feel the pain - as was evident in 2015/16.
Overall, our analysts remain modestly positive on oil prices based on a further rebalancing of supply under the current OPEC agreement, but they do warn that there are some risks on the horizon, especially in light of rapid recovery in US shale activity.
Performance of Brent oil over 1yr
Source: FE Analytics
While many companies are now better placed to deal with lower oil prices, share prices would still be hurt severely by a scenario any less positive than the current consensus and oil price volatility remains a key risk. This could create significant funding constraints for oil companies.
Michael Sayers is director of research at Fidelity International. The views expressed above are his own and should not be taken as investment advice.