Is the current market volatility sentiment or fact?
One of the best pieces of financial advice I’ve ever received is to write down why you are making an investment. While it may be blindingly obvious why you are excited about a new opportunity today, it may be less clear tomorrow when the price is falling and you are in a lather about whether to hold, buy more or sell.
A note setting out the reasons why you liked the investment in the first place will give you something tangible to focus on when your brain has been unsettled by the prospect of losing money. Unless you are one of those rare sentiment-free investors, the emotions triggered by financial loss are guaranteed to lead to bad decision-making.
I was reminded of this sage advice by the publication last week of Fidelity’s annual Analyst Survey. This is a snapshot of what company bosses all around the world are thinking and it provides a great data-driven, bottom-up view from the corporate coal-face. It is even more interesting when the world has apparently changed out of all recognition in the weeks between the survey data being collected and its publication.
This is the situation this year when the field work for the 2020 survey was conducted in December, just before most of us had used the words Soleimani or Wuhan. But far from making the survey less useful, I think the time-lag makes it even more interesting. It shows what the world looked like before everyone started fretting about Iran and coronavirus. The survey, therefore, shows what the world might look like again when these scares have passed over, as surely they will in due course.
So, what can we learn from the distillation of 15,000 company meetings over the course of a year held by 151 analysts across five continents? Boiled down to one figure, the overall sentiment indicator in December was positive but only just and lower than in both the previous years. The last time it was this weak was in 2016, perhaps unsurprising at the end of a year towards the end of a 10-year economic upswing and dominated by the US/China trade war.
Despite the more sober tone to the survey, the prospect of recession seems to have reduced. On the admittedly fairly bold assumption that coronavirus is largely contained in central China, a dwindling proportion of companies are planning for the end of the cycle. Two thirds think the positive environment will grind on throughout 2020. A year ago, half were getting ready to batten down the hatches.
Interestingly, this dynamic is particularly in evidence in China, where three-quarters of analysts said companies were expecting a continuation of the cycle, up from 30pc a year ago. And confidence that recession has once again been postponed is persuading companies that it makes sense to invest for growth. This is notably the case in sectors where environmental considerations are a big factor. Spending on climate change mitigation and low carbon technologies is increasingly a focus. Related to this is a noticeable growth in the number of companies expecting to raise money in 2020, not because their balance sheets are under stress but because they see opportunities to invest and plenty of cheap money available with which to do so.
Another example of the glass-half-full view of the world that prevailed before the latest health scare is the attitude to ageing societies. In the past this has largely been seen as a negative for growth. Now many more companies are seeing the opportunities in adapting to an older world, with IT and healthcare expected to be the biggest beneficiaries.
In fact, for the second year in a row, healthcare is the sector with the highest confidence levels. Not only is capital expenditure rising, a renewed focus on mergers and acquisitions is forecast. This is one of the few sectors where companies are confident of pushing through price rises. Even fears about regulation are far from widespread. Accelerated drug approval policies are encouraging two-thirds of businesses in this sector to think about increasing investments into emerging markets, more than in any other industry.
The second most optimistic sector is technology where none of the analysts questioned saw a slowdown or recession on the horizon compared with 28pc a year ago. The need to automate as demographic trends lead to shrinking workforces is a key driver. Strong balance sheets and good pricing power add to the sector’s attractions.
When it comes to the regions, it is clear that the coronavirus outbreak could not have come at a worse time for China. Even in December, the country’s sentiment indicator was weaker than in any other part of the world, albeit the rate of decline in the economy appeared to be slowing down. None of the China analysts expected a hard landing, despite the twin headwinds of a general slowdown and a bruising trade war with America.
Just as the anecdotal evidence from thousands of analysts’ company visits is cautiously optimistic, so to is the message from the fourth-quarter earnings season which is now drawing to a close. With around 75pc of companies in the S&P 500 index having now reported their profits in the December quarter, it now looks likely that earnings will have risen modestly. This will be the first increase in profits for four quarters. More importantly, the outlook for 2020 is for a respectable rise in earnings of about 8pc.
So, there really is logic to the market’s apparently complacent response to China’s health scare. Investors are attaching more weight to the underlying strength of the economy and corporate earnings than to the possibility of a long-lasting pandemic. It really is useful to have a reminder to hand of what the world looked like only a couple of months ago and what, fingers crossed, it will look like again later in the year.
Tom Stevenson is an investment director at Fidelity International. The views are his own. He tweets at @tomstevenson63.
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.
Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements ("PDS") for the fund(s) mentioned in this document before making any decision about whether to acquire the product. The PDS is available on www.fidelity.com.au or can be obtained by contacting Fidelity Australia on 1800 119 270. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad-based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity's funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. References to ($) are in Australian dollars unless stated otherwise. Details of Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website.
The information transmitted is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this in error, please contact the sender and delete the material from any computer. Any comments or statements made are not necessarily those of Fidelity Australia. All e-mails sent from or to Fidelity Australia may be subject to our monitoring procedures. E-mail communications cannot be guaranteed to be timely, secure, error or virus-free. The sender does not accept liability for any errors or omissions which arise as a result.
© 2020 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.
Ready to invest in the Fidelity Asia Fund?Discover now