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.

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