One of the reasons that investing is so difficult is that markets and the economy march to a different beat. It is usually safe to assume that what you see happening around you has already been factored into stock market prices. The collective wisdom of the world’s investors will almost certainly have got there first.
Even that complicated relationship oversimplifies things. Markets don’t always get it right. And even when they do, the time lag between a change in the investment consensus and reality catching up is frustratingly variable. It’s why anyone who’s been around financial markets for a while will tell you it’s time in the market that matters not timing the market.
I was struck by this mismatch when reading the latest iteration of our annual Analyst Survey - a distillation of the 20,000 or so meetings our analysts have with companies every year. It’s a unique insight into what the people running thousands of businesses around the world are thinking about. What it’s not, because of the way markets and the economy diverge, is a guide to how investors are likely to respond to these shifting sands.
One of the stand-out themes from this year’s survey is how optimistic everyone is about Japan. Expectations for revenue and earnings growth in 2024 are higher than for any other region of the world. Whether it’s earnings and margins, return on capital, dividends or the ability of companies to pass on rising costs to consumers, analysts report that the people running the businesses we invest in are more positive in Japan than anywhere else.
What’s interesting is that a year ago those same company bosses in Japan were downbeat. At the end of 2022, nearly a third of business leaders were telling our analysts that they were expecting no growth at all in 2023. They were the most pessimistic group of CEOs anywhere outside eastern Europe and Latin America. Same story when it came to revenues, margins and plans for capital expenditure.
Guess what? The market saw through that pessimism in 2023. Japan was the second-best performing stock market after Nasdaq last year. The Nikkei 225 index rose by nearly 30pc. All that boardroom gloom and doom was a raging buy signal.
Clearly things are now going pretty well in Japan. Nearly nine in ten analysts think the companies they follow will be growing in a year’s time. That compares with six in ten for the world as a whole. Part of that relates to their financial strength. Japanese companies are flush with cash, so only 2pc of them are expected to need to raise funds in the next 12 months, versus 45pc in China and 27pc in Europe.
When it comes to inflation, Japan looks to be in a sweet spot. Every single analyst says the bosses they talk to are confident that they can pass on higher costs. In both China and North America just one in six think they will be able to pass through rising prices.
Now compare the glass half full view of the world in Japan with what the managers are saying on the ground in China. Here nearly as many analysts are pencilling in a slowdown or deep recession as are looking for an expansion in the year ahead. Revenue and profit margin expectations are weak compared with the rest of Asia.
China is now the only region in the world where analysts expect labour costs to decrease over the next six months. That eases pressure on companies’ bottom lines but it is also a reflection of weak growth. China is also one of only two regions where non-labour costs are expected to drop. Consumer sentiment is weak, growth is expected to slow and interest rates will trend lower.
Unsurprisingly, China is now the region with the highest proportion of managers who are less confident about investing in their businesses than they were a year ago. The percentage of chief executives expecting earnings to grow has fallen from 81pc to 58pc in the past year.
You’ll see where I’m going with this, I’m sure. Last year, China was the worst performing of the world’s stock markets as investors once again got there first. Increasingly it is looking like an awful lot of bad news has now been priced in. It is going to be interesting to see at what point investors start to look beyond the dark clouds on the immediate horizon to the brighter skies beyond.
The way everyone is talking about China today sounds an awful lot like the way Japan was being discussed a year ago. Japan was cheap and unloved then. Now it’s flavour of the month.
One of the most encouraging aspects of this year’s survey, counter-intuitively, is that much of the world is following the China template but only in the short term. Many of the real-time indicators are the most downbeat in years while some of the more forward-looking ones are starting to sound more positive. Half of analysts describe the companies they follow as being in an expansion phase today but more than 60pc think they will be in a year’s time once we have pulled through what is likely to be a mild recession.
Hearing first-hand what managers think is going on in their businesses today is a useful guide, but the Japanese and Chinese examples show that impatient investors are more interested in what comes next and how it’s being priced. What matters is the gap between sentiment and reality. It didn’t matter a year ago that Japanese bosses were gloomy. What counted was that investors were gloomier still.
Only 11pc of Chinese companies expect returns to improve this year. What’s more important is that a market priced on just nine times earnings has already factored that in. No-one expected Japan to be a top performer last year. And very few now have a good word for China. We shall see.
Tom Stevenson is an investment director at Fidelity International. The views are his own.
