Some sectors may be set for a margin squeeze

Rising cost pressures and a drop in pricing power are a recipe for a margin squeeze. The latest reading from Fidelity International’s monthly analyst survey shows which companies are struggling with inflationary pressure but also weaker pricing power.  

This week’s Chart Room takes a fresh look at the ongoing debate over reflation vs. disinflation, and what it could mean for corporate bottom lines.

By extracting bottom-up, global data from Fidelity International’s most recent monthly analyst survey, we gauge the inflationary pressures facing companies across 10 key sectors - and compare this with how their pricing power has been affected by the fallout from the Covid-19 pandemic. Those sectors with a large mismatch, such as financials and consumer discretionary, could be in for a squeeze on margins.

 

 

In the October survey, Fidelity’s analysts were asked whether they expect the companies they cover to face any cost price inflationary pressures in the next six months. There is currently some disagreement between market participants about whether we are facing an inflationary or disinflationary environment, and our analysts’ responses suggest both scenarios are in play, with inflation pressures varying across sectors.

We also asked our analysts how their companies’ pricing power had been affected by the pandemic. By combining data from the two questions, we can build a picture of which sectors could face pressure on margins - and which could see their margins expand.

Margins in the financials and consumer discretionary sectors appear most at risk of a squeeze. Firms in both sectors have seen their pricing power fall significantly since the beginning of the year. Ultra-low rates have hurt many financial companies, while lockdowns have hit many parts of the consumer discretionary sector the hardest.

The technology sector, on the other hand, looks poised to see margins increase. Pricing power has strengthened since the beginning of the pandemic, outstripping our analysts’ views of cost inflation in the sector. Pricing power has also risen among healthcare and materials companies, not as much as inflation expectations, but it does provide an indication of where opportunities lie.

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.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken 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. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

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