Analyst survey 2021: Counting down the days

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Key takeaways

• Business optimism is rising, our analysts report. They expect a revival of global growth to be backed by both barrels of monetary and fiscal stimulus in 2021, assuming new Covid variants don’t delay the easing of lockdowns. This will support corporate profits and bolster the case for equities. 
• While the recovery will be uneven, varying by industry and region, those worst hit in 2020 should benefit most from any rebound in 2021. Capital is abundant though company leverage is set to decline. 
• Finally, more companies than ever are discussing environmental, social and governance (ESG) initiatives, spurred on by regulatory and fiscal spending priorities. This should translate into a real-world reduction in CO2 emissions, with almost a quarter of companies expected to reach net zero by the end of the decade. 

After months of lockdown in many parts of the world, it’s not just home-bound workers counting down the days until Covid-19 restrictions are eased. Companies, countries and entire regions are poised to rebound strongly later in 2021 as pandemic measures are rolled back, according to 144 Fidelity International analysts we surveyed about coming trends. 

The survey took place in December, before the threat of new variants became clear. In light of this, we re-asked some of the key questions in early 2021. Our analysts report a short-term knock to management confidence as timelines are moved back in some regions, but an even more optimistic corporate outlook for the year ahead. This survey offers investors some sense of the scale of that recovery. 

For the first time, a majority of our analysts report that sustainability issues have become a priority for their companies globally, as industries are transformed in the race to net zero carbon emissions. The rise in concern for employee welfare observed during the pandemic will recede somewhat, although it is now permanently on the agenda.

Recovery differs across regions and sectors

Managers across the board are upbeat about the prospects for their companies. And they have good reason to be. Interest rates are low, real yields are negative and fiscal policy is supportive, signalling a favourable environment for a rebound in global growth in 2021 and beyond. 

However, the pace of recovery will differ across countries and industries, depending on vaccine rollouts and the potential impact of new Covid variants, creating investment opportunities and risks. China’s ‘first in, first out’ advantage in 2020 should carry through into 2021. Europe and the US will gradually recover as vaccines are rolled out and economies reopen, with the potential for a surge in activity in the second half. 

The picture for sectors is positive, but more mixed. The CEOs of energy companies, which have been pandemic ‘losers’, are much more confident than they were for 2020, albeit after one of the worst ever years for the sector. Those running consumer discretionary companies (also net ‘losers’) are optimistic too, but to a lesser degree than those at pandemic ‘winners’ such as technology. Domestic sectors that suffered the most in lockdown should benefit the most from any reopening, though international sectors such as airlines may take longer to recover.

Other findings support the overall improving trend. Our analysts report that mergers and acquisitions are ticking up. Dividends should return after a year in which sectors such as banks and energy were compelled to cut them. Return on capital is set to rise across all regions and sectors (except telecoms and utilities), driven by higher end-demand growth and the restarting of investment that was put on hold due to the pandemic, according to the survey respondents. 

Activity will be constrained, however, by a desire to reduce leverage in sectors that borrowed heavily in 2020 to survive. Overall debt is likely to decrease moderately or stay the same in 2021, according to 80 per cent of analysts. Simultaneously, default rates among listed firms are expected to drop from the elevated rates of 2020, assuming credit conditions remain favourable.

A consumer discretionary analyst puts it like this: “Management teams are more willing to invest from the subsistence level in 2021, but it's challenging given they burned so much cash in 2020.” 

Fortunately, funding costs are expected to fall (everywhere except China), as many central banks seek to keep rates low. Raising capital shouldn’t be a problem, even for sectors such as utilities and telecoms that need to fund big infrastructure projects. Equity and credit markets raised over $400bn in January 2021 alone, almost double the average for the month.[1]

Not your usual cycle

More of our analysts report their sector is in the initial recovery phase of the economic cycle than in any other phase. However, some countries such as Japan (which is geared to cyclical upturns) are expected to have shifted towards mid-cycle expansion by the end of the year. 

China appears to be further advanced in the economic cycle than other regions - 36 per cent of our analysts there report their companies are already in mid-cycle expansion compared to 24 per cent globally - with some analysts already expecting growth to slow towards the end of 2021 as the Chinese economy normalises fully. This may be accompanied by a retightening of credit conditions that could slow growth in China. But we expect the strong rebound in other economies would offset this at a global level.

One China consumer analyst based in Hong Kong points out that the sharp recovery last summer was driven by a lot of pent-up demand, with 30 to 40 per cent growth for some businesses, but consumer activity is still not back to 100 per cent. Sectors such as tourism and travel have been largely bypassed. The analyst says: “That’s not to say things aren’t recovering in these areas; it will probably just take some time. Consumption should be the main driver of growth this year, as export demand should moderate.” 

Such a rapid shift suggests this is not a typical cycle, in China and perhaps elsewhere. Instead, it looks more like a setback and recovery, rather than a full reset. 

Fiscal policy should be net positive

In some countries, the economic damage will take longer to repair. Governments have recognised the need for fiscal as well as monetary stimulus to help businesses recover. In aggregate, the majority of analysts believe that fiscal policy will have a more positive impact this year than last, most of all in Asia Pacific, according to our analysts who cover the region.[2]

Global stimulus is expected to recede in 2021, especially in countries such as China where the pandemic is relatively controlled. But more support could be needed for specific sectors such as financials and hospitality in developed markets. One banking analyst says: “The vaccine has given some hope, but banks do expect bad loans to form as government schemes start to roll off.” Governments’ ability to borrow to keep schemes in place could be constrained by record debt levels, despite low interest rates. 

Fiscal spending is likely to benefit sectors such as utilities and industrials most, especially in North America, while higher corporate taxes could weigh on areas such as healthcare. One industrials analyst says: “The extension of US renewable tax credits in a recent stimulus bill is an incrementally positive fiscal policy development.” 

ESG emphasis rises again

This fiscal tilt towards sustainability ties in with a growing corporate emphasis on ESG, one that stretches across all sectors and regions and builds on a multi-year trend. For the first time, over half (54 per cent) of our analysts report that the majority of their companies now regularly discuss sustainability issues. This compares with 46 per cent in 2020 and just 13 per cent as recently as 2017. Moreover, a quarter of all the companies our analysts cover are likely to reach net zero emissions by the end of the decade. [For more on this topic, see ‘The race to net zero is on’.]

Rules relief for tech but not energy

New regulations on companies will increase at a slower rate in 2021 than in 2020, with the exception of those in China, according to our analysts. One materials analyst covering China says: “Higher capex is likely to be used to meet more stringent environmental regulations around emissions.” 

Technology analysts - among the most optimistic for 2021 even after a strong 2020 - expect fewer new regulations in 2021. This is despite the social media storm around the US election and increased interest in regulating online platforms. Instead, the energy sector appears to face the biggest regulatory risk in 2021, especially in relation to curbing carbon emissions. One energy analyst says: “A legislative freight train is coming down the track.” By contrast, after waves of regulation in recent years, financials analysts expect the pace of new rules to slow in the year ahead.

Conclusion

A return to the daily commute still appears some way off for many, but the path to recovery is emerging. Vaccines are the way out of the pandemic, but they take time to roll out and must contend with new variants. Progress will differ between countries, with China still ahead. When economies do finally reopen, our analysts predict that activity could erupt, particularly in some of the worst hit sectors. Investors will have to pay special attention to sector and regional nuances in 2021.

[1] Source: FT.com: Companies raise $400bn over three weeks in blistering start to 2021 | Financial Times (ft.com)

[2] N.B. The survey was completed before the $1.9 trillion stimulus was announced in the US.