There has been a record drop in sentiment in the latest Fidelity International Analyst Survey, although the group’s investment experts do not believe a recession is imminent.
The Fidelity Sentiment Indicator is an aggregate measure of corporate confidence through the eyes of the group’s 165 analysts that take part in the survey. This year, the indicator stands at 0.6; this is down from 1.6 in 2018 and represents the sharpest drop ever in the reading.
“While a decline in overall economic activity may still be a way off, we can already discern its faint outline in the numbers. From the point of view of corporate sentiment, an exuberant start to 2018 has given way to a cautious 2019,” the Fidelity International Analyst Survey report noted.
“Our analysts are reporting the first signs of a decline, aided and abetted by political volatility, rising input and funding costs and weaker consumption.
Global sentiment falls from its peak
Source: Fidelity International Analyst Survey 2019
“But it would be a mistake to interpret this as a signal to retreat. Throughout the survey our analysts report pockets of optimism and success. As the business cycle turns, life is becoming more difficult for companies - the good ones have to work harder to win and our research team’s job is to find them.”
Fidelity’s analysts added that despite “the alarming plunge” in the corporate sentiment readings, it’s important to keep in mind that it remains in positive territory and does not represent a retrenchment.
The survey also found that there has been a shift in the number of analysts who think their particular sector is heading into a slowdown and are expecting the end of the business cycle to occur sooner rather than later.
One-third of those polled in this year’s Fidelity International Analyst Survey said their sectors are either in a slowdown or a recession, compared with just 13 per cent in 2018. Only one-fifth are seeing an expansion, down from 35 per cent in one year ago.
Meanwhile, Fidelity’s analysts are now split 51 per cent to 49 per cent about whether we are at the end of the business cycle. This compares with 68 per cent for ‘no’ last year.
“The pessimism has two core drivers, a weaker consumer and increasing costs of doing business. Both of these threaten to squeeze profit margins in 2019. This is borne out by the marked decrease in analysts expecting better returns on capital, from 48 per cent in 2018 to just 18 per cent now,” the report added.
“China dropped from 43 per cent to just 7 per cent and North America from 50 per cent to 20 per cent. Globally, four out of 10 analysts foresee a negative return on capital over the next 12 months.”
The business cycle rolls towards a slowdown
Source: Fidelity International Analyst Survey 2019
The sub-title of this year’s Fidelity International Analyst Survey is ‘the end of optimism’ although it pointed out that anxiety is unevenly spread around the world. China – the world’s second largest economy – stands out as one area where this lack of optimism is most pronounced.
Around half of analysts covering China said they have seen a drop in management confidence, compared with just 10 per cent in last year’s survey. The Chinese consumer is “in a stall” and the country’s businesses are reacting accordingly: half of Fidelity’s China analysts expect a reduction in capital expenditure, against 18 per cent in North America and only 8 per cent in Europe, Middle East & Africa and Latin America.
The downturn in Chinese confidence can be seen in its car market, which with 25 million vehicles sold annually is the biggest in the world. But an industrials analyst pointed out that they “cracked” in the final four months of 2018.
Likewise, the luxury industry has become more dependent on the Chinese tourist for growing sales around the world: China is home to around 35 per cent of its consumer base. However, analysts said luxury’s high double-digit sales growth of the past few years could fall to about 6 per cent in 2019 – although they are fears that it could fall to zero.
Added to the challenging business environment is the “chaos” created by the uncertain global political climate.
Fidelity’s analysts working on a range of sectors and geographies warn the unstable geopolitical backdrop is increasing costs of business and driving a pessimistic outlook among the companies they cover.
The information technology, energy, consumer and industrials sectors were the areas deemed to be most at risk from political uncertainty, for various reasons.
Managers are the least confident about investing in their businesses since 2016
Source: Fidelity International Analyst Survey 2019
“Our analysts’ responses do not suggest a full-blown recession in the next six to 12 months, but the overall picture is less rosy than last year,” Fidelity’s report concluded.
“We have taken another step towards the end of a cycle that started a decade ago amid the economic wreckage of the financial crisis. The signs are there, report analysts. Managerial confidence is dented by increasing costs and decreasing ability to pass them on to the end consumer, coupled with political uncertainty and trade friction between China and the US.
“Of the thousands of questions to be posed by our analysts to their companies in 2019, no doubt a fair proportion of them will be focused on how they intend to navigate these risks.”