Analyst survey 2021: Sector by sector
- Healthy balance sheets after the pandemic pave the way for healthcare firms to focus on growth investment.
- Zero-carbon targets will push utilities companies to increase capex on renewable capacity even further.
- Regulatory pressure means sustainability issues will be front of mind for energy companies, changing the shape of the industry.
The healthcare sector is a broad one, covering everything from Covid-19 tests to hearing aids. Some companies have outperformed during the pandemic, while others have struggled with weak demand. Overall though, nearly 40 per cent of analysts report management teams are more optimistic about the year ahead, while not a single one reports shrinking confidence.
Almost all (93 per cent) say that growth investment is now a top priority for their companies, a return to the same level seen directly before the pandemic, while 60 per cent point to new markets and products as the main source of earnings growth, up from 46 per cent a year ago. One analyst covering Europe thinks there could be a rise in bolt-on acquisitions among diagnostics companies that have built up cash piles from selling Covid-19 tests.
Balance sheets look healthy across the sector. Many companies have already raised capital and are in a good position to fund deals. Others could use cash to pay down debt, with over half our healthcare analysts expecting debt levels at their companies to fall over the next 12 months.
Analysts believe fiscal policy will have a mixed impact. While government stimulus has supported companies that offer Covid-19 treatment, testing and vaccines, an analyst who covers Europe argues: “The prospect of corporate tax increases in the US outweighs the positive of the likelihood of more Medicare coverage”.
Healthcare companies that provide services or devices for elective procedures should start to recover as economies reopen, while diagnostics firms will continue to see strong demand.
The utilities sector proved resilient in 2020. Although commercial electricity demand fell during the pandemic it stayed high for residential customers. The industry remains at the forefront of the transition to a low-carbon economy. All our analysts expect an increase in their companies’ commitment to developing sustainable products or services over the next 12 months.
The Democrats’ majorities in Congress and control of the Presidency could be “incrementally positive for clean energy policies in the US”, according to one analyst covering North America. Although President Joe Biden may struggle to achieve zero-carbon electricity by 2035, utilities companies will still need to invest in renewable energy sources and upgrading the grid. "Capex levels are likely to continue to rise at regulated electric utilities and renewable independent power producers”, continues the analyst.
This phenomenon is not just limited to the US. One analyst says that the energy transition has created “major” opportunities for companies in EMEA and Latin America to increase capex.
While balance sheets look solid across the sector, 75 per cent of analysts expect that debt will increase as companies invest in renewable capacity. But, anecdotally, analysts believe that companies are in a good position to raise the requisite funds.
Utilities firms are expected to divert funding towards capex this year, as analysts argue that investing in renewable energy sources will help companies stay competitive.
Last year was one of the worst on record for the energy sector as the oil price plunged (briefly below zero) and earnings took a severe hit. Our analysts expect a dramatic recovery in 2021 as demand picks up towards the second half of the year. More than three-quarters of our analysts report that management teams are more confident about investing in their businesses over the next 12 months, while all expect returns on capital to increase.
Companies need oil prices to bounce back, with 90 per cent of analysts saying that changes in commodity prices will drive earnings growth. But even though balance sheets are stretched, 80 per cent of analysts think debt will fall over the next year. “We are nine months into a sector crisis and companies have cut capex and operating costs significantly”, reports one analyst covering Europe. While 40 per cent of analysts expect funding costs to fall, one analyst notes that fewer banks want to lend to fossil fuel companies.
The sector faces numerous challenges and 89 per cent of analysts think regulations will increase, compared to 33 per cent last year. One analyst covering companies in Europe reports that he “expects incremental environmental regulations each year which will increase costs and reduce returns and cash flow”.
Energy firms will need to change to survive. But the current pace of change is slow. While 90 per cent of analysts report a greater desire to communicate and implement ESG policies at their companies, they expect only 2 per cent of firms to be carbon neutral by 2030 (compared to a global average of 24 per cent). Don’t hold your breath.
Prudent capital allocation and clear decarbonisation strategies will separate the winners from the losers in the energy sector.
The outlook for the financials sector hinges on the vaccine rollout and the return of economic confidence. While 75 per cent of our financials analysts report rising confidence among management teams in 2021, there is considerable variation between the sub-sectors.
Insurance analysts are more positive about the year ahead, pointing to strong pricing for property and casualty insurance, greater certainty about pandemic losses and a muted impact from the European Insurance and Occupational Pensions Authority’s review of Solvency II regulations (a set of uniform rules for European insurers).
By contrast, banks remain under pressure from low interest rates. This means that 40 per cent of analysts covering financials expect pricing power to decline, compared to a global average of 15 per cent. And while loan losses have largely been prevented by government-guaranteed loan schemes, analysts worry that bad loans could start to accumulate as support is wound down.
A faster-than-expected recovery would lower the possibility of further interest rate cuts, allow firms to reinstate dividends, and reduce potential loan losses. Mergers and acquisitions (M&A) are expected to tick up, with one analyst arguing that domestic consolidation is seen “as the only remedy to low bank profitability”.
The trajectory of interest rates will determine how financial firms fare over the next 12 months, although insurance companies should perform well even in a low-rate environment.
The outlook for the tech sector is relatively bright. While the Democrats’ control of Washington could mean more regulation for large US tech firms, the Covid-19 mutations mean that home working will continue for longer. “Most companies associated with home working are seeing a longer positive cycle than expected,” says one analyst covering China.
Geopolitics are a cloud on the horizon. Almost half of our tech analysts think that political wrangling could have an impact on strategic investment plans. One analyst covering North America comments that US-China tensions could lead to “a permanent decoupling of the global tech supply chain”.
Geopolitical tensions are unlikely to go away, but fiscal stimulus and home working should continue to support tech firms.
Three-quarters of our telecoms analysts think that M&A will increase this year. While analysts covering other sectors expect bolt-on acquisitions to make up the majority of deals, those covering telecoms expect to see more major strategic M&A in 2021 as a wave of consolidation continues. Balance sheets are sound, although analysts think that slightly more companies will need to raise capital than last year to fund new 5G networks.
Telecoms analysts are the most worried about geopolitics and 75 per cent think capex and M&A could be affected. Donald Trump may have left office, but Huawei’s network supply still needs to be phased out, which will come at a cost to telecoms companies.
M&A should drive consolidation in the industry and help companies navigate higher price competition this year.
With many countries back in lockdown, the consumer staples sector should continue to enjoy a boost from eating at home. “The recent virus mutation and consecutive lockdowns have improved the food retail outlook”, reports one analyst covering Europe.
But while analysts think that management teams are broadly more confident investing in their businesses over the next 12 months, fiscal policy is set to have a negative impact. Food retailers in Europe are expected to be exempt from further stimulus, while lower government transfers to consumers could affect spending.
Companies with strong brands, multi-channel operations and good customer loyalty should perform well as lockdowns are eased.
Although restrictions have tightened again in some parts of the world, more than half our consumer discretionary analysts say that management teams are more confident about investing in their businesses over the next 12 months. “Recovery expectations seem to be pushing a bit further into the future”, reports one analyst covering North America. Analysts believe that pent-up demand could be unleashed later on in the year, with one pointing out that “high savings levels will continue to support consumption”.
Recovering demand should increase return on capital, while funding costs are expected to fall from elevated levels. More than two-thirds of our analysts think companies will reduce leverage as EBITDA rises, cashflow improves and firms wait to resume shareholder pay outs.
While travel and entertainment are dependent on a quick vaccine roll-out, pent-up demand should start to benefit luxury goods companies.
Industrials analysts are optimistic about the year ahead. While new lockdowns threaten demand, the Democratic administration and control of Congress “set the stage for greater stimulus in the US and particularly anything geared to the energy revolution”, according to one capital goods analyst.
But higher spending raises prices and 64 per cent of analysts think inflationary pressures on company cost bases will increase this year. This will decrease margins for some companies, as pricier fuel and raw materials hurt auto and airline earnings. Regulation will have a varied impact, with one analyst covering Europe pointing to “tighter regulations on internal combustion vehicles…and greater targets/incentives for electric vehicles”.
Most companies should benefit from higher infrastructure spending and government incentives, while a pickup in travel later in the year should improve the outlook for airlines.
Materials analysts expect that rising metal demand will push returns on capital higher this year, while leverage should fall as realised revenues increase. “With rising metal prices and spreads, cash generation has improved significantly leading to stronger balance sheets”, reports one analyst covering the Asia Pacific region. But, as with the industrials sector, rising prices will also affect costs and 89 per cent of analysts think inflationary pressures will increase for their companies.
Regulations will continue to weigh on the sector. “Tougher environmental and safety regulations will require significant investment over the next decade”, says one analyst covering EMEA and Latin America.
Demand for metals will boost the sector, while analysts argue that companies with strong decarbonisation strategies will outperform this year.
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