Abenomics turns a corner

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Abenomics turns a corner as Japanese firms are showing the biggest boost in confidence levels against any other global region overtaking both the US and Europe, the 2015 Fidelity Worldwide Investment survey of 159 equity and fixed income analysts has revealed.

The survey, which provides investors with insights into the expectations of company management teams across a range of regions and sectors, is the culmination of 17,000 one-to-one meetings held each year between Fidelity’s analyst team and corporate decision-makers. It asks for views on confidence levels, as well as planned capital expenditure, expected returns on capital, the strength of the balance sheet and expected dividends returns among other things.

Drawing on these first-hand views, one in three Fidelity analysts globally found that company management teams across the globe are more confident than they were 12 months ago, in Japan this rises to 50%, followed by Europe at 42% and the US at 37%.

Japanese companies also look more positive on every other indicator measured in the survey, compared to other regions.  Most notably, in Japan more than anywhere else, the Fidelity analysts expect both industry returns and dividend pay-outs to improve.

Henk-Jan Rikkerink, head of Equity Research at Fidelity Worldwide Investment, commented: “It’s very interesting to see that Japan stands out as the strongest region overall and bucks the trend in a number of areas in the survey.  For the time being at least it seems the reforms initiated by Prime Minister Abe appear to be working. Japanese companies are giving the ‘Abenomics’ reform programme the benefit of the doubt, and the indicators show we will see impact on the real economy.

“In other regions, modest optimism also prevails in Europe as a result of improving company fundamentals, lower oil prices and a cheaper euro. US conditions are expected to remain broadly stable at healthy levels.”

Fidelity Global Sentiment Index

Based on management confidence levels, along with four other factors -– Fidelity’s Global Sentiment Index** fell back slightly from 6.4 points in 2014 to the current level of 5.7 points. The survey also revealed a growing regional differentiation with developed markets achieving the highest Global Sentiment Score led by Japan at 7.1 points, ahead of Europe (5.8 points) and the US (5.6).

Japan in detail

In addition to management confidence, Japan also scored well in terms of analyst predictions for planned capital expenditure changes. Around 80 per cent of Fidelity’s Japan analysts expect stable or increased capital investment (USA: 74 per cent, Europe: 64%). Three out of four analysts (75%) assume that companies will generate an increasing return on capital, whereas in Europe, this is only 36%. In the US, only every fourth analyst assumes that higher returns will be forthcoming (23%).

Balance sheet strength looks similarly positive for Japan, with 70% of Fidelity’s Japan analysts saying their companies’ balance sheets have strengthened, more than in Europe (67 %). In the US only every second analyst holds this view (50%).

Rikkerink comments: “Given these strong company balance sheets, analysts are also expecting rising dividend payments. Three out of four of the analysts surveyed are assuming that Japanese companies will be increasing their dividend pay outs to shareholders over the coming twelve months.”

Emerging markets and China

The outlook for emerging markets, however, is less positive. The regions of EMEA (Eastern Europe, Middle East and Africa) and Latin America are lowest in the regional rankings with a Global Sentiment Score of 4.3 points. Around 59 per cent of the analysts state that management confidence has deteriorated significantly or very significantly among the companies they cover, and only eight per cent of analysts report rising management confidence.

Half of the analysts (50 per cent) believe that companies will cut back on capital expenditure over the next year. This is particularly due to weakness in the energy sector as a result of the collapse in the price of oil. Furthermore, the strong dollar is increasing the cost of funding in the region.

In China, about a third of Fidelity’s analysts state that management confidence among their companies has increased, and over 80 per cent of analysts covering China expect dividends to be maintained this year.
“A cautious approach prevails for China as economic growth slows,” commented Rikkerink. “However, a systemic crisis does not appear likely in 2015 and despite the economic slowdown, opportunities for income investors remain in one of the world’s largest economies,” said Rikkerink.

Sector leaders

The survey not only shows that differentiation among the regions has increased, differences between winners and losers are also greater in sectors, as innovative and knowledge-intensive sectors leave other sectors behind.

Healthcare achieved the highest Global Sentiment Score of 6.8 points, with 60 per cent of healthcare analysts identifying increased management confidence among their companies and an equal number expecting rising returns on capital. Every second analyst also anticipates increased dividend pay outs, while none predict declining dividends.

Rikkerink commented: “The positive prospects for the global healthcare sector are primarily based on scientific progress in medicine and research such as innovation in the area of oncology, immunotherapy and gene therapy. Population growth in emerging markets and ageing societies in developed markets mean that the healthcare boom is set to continue.”

Unsurprisingly, the picture for the energy sector looks very different with a Global Sentiment Score of 2.1 ranking this sector last by a long way. Around 85 per cent of energy analysts report deterioration in management confidence, and all energy analysts predict a reduction in capital expenditure in this sector. In addition, 92 per cent expect a decline in return on equity. “This assessment reflects the energy sector’s adjustment to significantly lower oil prices,” explained Rikkerink.

Income likely to remain healthy across sectors and regions

The number of analysts reporting dividend increases is highest in healthcare, followed by consumer staples and utilities. The only sector likely to see a significant decline in pay-outs is energy.

“One of the most positive findings of the survey is the strength of dividend expectations across the board: Less than 10 per cent overall expect dividends to be cut or scrapped as companies try to avoid the negative signals such actions send,” said Rikkerink. “Three out of four analysts expect higher dividends from their companies in Japan. Almost 50 per cent predict rising pay-outs in their sectors in the US, and in Europe a third of analysts see their companies increasing dividends.”

About the Analyst Survey “A Micro View on Macro Divergence”

Launched in 2012, Fidelity Worldwide Investment’s annual Analyst Survey covers all regions and sectors. The objective of the survey is to identify changes in corporate conditions at an early stage and identify new trends and investment opportunities. The survey is based on Fidelity analysts’ insights gained in numerous conversations with decision-makers at companies. On average, analysts conduct 17,000 company meetings each year. The views in the survey therefore reflect the perspectives of thousands of chief executive officers and other senior executives at companies from all over the world. The survey is a reflection of the meticulous investment approach pursued by Fidelity and of how its analysts’ individual company insights are harnessed across asset classes and regions from the bottom-up.

* Source: Fidelity Worldwide Investment.  A total of 159 equity and bond analysts from Fidelity took part in the survey this year. The survey was conducted in January 2015.

** The Fidelity Global Sentiment Index is based on a scale of 1-10, with 10 as the most positive value

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