Key takeaways

• North America analysts expect a boost from fiscal policy, tempered by higher regulations, under the Biden administration. 
• European analysts are upbeat, particularly about the second half, and expect the most decreases in debt among the regions.
• China analysts see companies leading global peers in the recovery cycle, and forecast an increase in funding costs.

North America: Optimistic for a fiscal boost

Our 45 analysts covering North America highlight two key themes this year - the impact of the recent US election and business normalisation after the pandemic. The new administration under President Joe Biden and the Democrats’ sweep of Congress could have wide ramifications across fiscal policy and regulations, especially those governing the environment. 

Nearly half of our analysts expect fiscal policy to be a net positive for their companies this year, although the picture is nuanced because greater government spending may be followed by tax increases. Only 18 per cent of our analysts predict geopolitics will have a negative impact on investment plans this year, down from nearly 60 per cent last year. The damage from protectionist measures is also expected to subside. 

The possibility of a higher regulatory burden is another outcome of the recent US elections - just over half of analysts covering North America expect an increase in regulations, higher than the global average of 37 per cent. 

Overall sentiment is positive though, with about four out of five analysts saying company managements are more confident to invest in their businesses this year than last. Nearly 60 per cent of analysts expect returns on capital to increase, with the majority of those citing higher demand as the main driver. 

“Having taken a cautious approach during the pandemic, homebuilder management teams are beginning to acknowledge that they need to start spending again in order to satisfy surging demand,” one construction analyst commented. 

The pandemic is also affecting the shape of the market. For example, consumers have been gravitating toward larger brands, and better-capitalised companies have continued investing, allowing them to increase market share. 

“Supply contraction in the restaurant space caused by the pandemic” gives scope for upside surprises, one analyst notes. “Surviving restaurants are likely to benefit from increasing market share.”

Europe: Low rates and stronger balance sheets

Our analysts covering Europe are upbeat about the year ahead. While the emergence of more transmissible Covid-19 variants may have delayed the return of economic activity in many sectors, causing month-on-month leading indicators and management confidence to moderate in January, the prevailing view is that the second half of the year will be much more positive. Analysts expect Covid-19 regulations to ease as governments roll out more vaccines. Confidence will return as populations become more mobile. 

“There is scope for the recovery in demand in 2021 to exceed expectations as things get back to normal,” remarks an analyst covering European apparel and luxury goods. “My companies have been positively surprised by the recovery in luxury demand so far and in the robustness of Chinese demand.”

Two-thirds of analysts expect a decrease in overall debt, more than any other region. Many companies took advantage of lower funding costs and policy support to over- or pre-fund in 2020. Stronger balance sheets, low rates and a brighter outlook pave the way for mergers and acquisitions that have been limited during the pandemic. 

“There was already a divergence in the sector before the pandemic between winners and losers,” the apparel and luxury analyst continues. “The crisis has made this gap even wider, with the winners emerging stronger with solid balance sheets, which I expect they will use to increase M&A in 2021.”

Geopolitical risk is still a hindrance to investment plans. Of our analysts covering European companies, 44 per cent expect geopolitics to have a negative impact this year, the highest proportion of any region except China, and only slightly lower than last year despite the recent resolution of Brexit. Many European companies have a global network of buyers, and several analysts cite US-China tensions as a driver of this impact.

China: Sentiment points to sustained lead in global recovery 

Chinese executives enter 2021, the year of the Ox on China’s lunar calendar, increasingly bullish about the economic outlook, including plans to boost capital expenditure and hire more workers, according to Fidelity’s analyst survey.

More than half of our China analysts report management teams are more confident about the year ahead, with only 4 per cent noting confidence was lower. On a monthly basis, management optimism has further risen in January from December, bucking a global moderation of sentiment as Covid-19 variants emerged in many countries. 

A “first in, first out” recovery from the Covid crisis is gathering steam in China, where spread of the coronavirus remains largely under control and exporters take advantage of supply-side disruptions in Western countries. While global firms appear to be in an initial phase of recovery, our analysts in China report their companies are further advanced in the economic cycle - 36 per cent say their sectors are in the mid-stage of expansion, compared to a global average of 24 per cent. And only 18 per cent of China analysts report their sectors in an initial recovery, significantly below a 34 per cent global mean.

Meanwhile, China analysts are more optimistic about job growth over the next 12 months than those in any other regions. Our analysts expect workforces to grow by 6 per cent on average this year at Chinese companies, compared with an average of 2 per cent globally, and contractions in Europe and Japan.

Despite the general optimism, China faces a unique challenge in the year ahead: it’s the only region where analysts forecast a rise in funding costs. It’s also the only region where default rates are expected to rise over the next 12 months. 

As the recovery deepens, the normalization of monetary policy, or at least the expectation of it, will loom large on the horizon. Tough measures against property speculation, including curbs on bank lending to developers and homebuyers, are adding to an increase in funding costs. 

Japan: Exporters bolstered by China recovery 

Our analysts report that the management teams of Japanese companies are much more optimistic about the year ahead compared to last year’s survey, citing sales growth and improving returns on capital. Like elsewhere in the world, the main factor analysts are watching is the economic recovery from the pandemic. 

Two-thirds of analysts report rising demand will be the main driver of earnings growth in Japan over the coming year, more than in any other region. The country also has the highest expectations for margin increases. This is mainly driven by companies with large exports to China, whereas those with a domestic focus will continue to struggle amidst Covid-19 lockdowns. In January 2021 the government expanded travel restrictions and restaurant curfews after a resurgence in Covid-19 cases.

“How, if at all, do you expect the typical workforce size at your companies to change from current levels over the next 12 months?” Source: Fidelity Analyst Survey 2021.

 “The scope for positive surprises depends on the speed of recovery after Covid,” notes a consumer staples analyst in Tokyo. “The biggest risk factor is further lockdowns negatively impacting demand.”

This uncertainty is forcing companies to be conservative about their spending plans. Many are cashflow positive and have ample cash on their balance sheets, but it’s being used to pay down debt rather than expand capital expenditures. Not a single member of our team of Japan analysts expects debt to rise at their companies this year, compared to a global average of one in five. 

Demographics remain a key challenge, affecting areas like hiring and inflation-targeting. Our analysts expect workforces to shrink due to lack of available labour, and many corporates have been forced to hire from outside Japan. Meanwhile just a quarter of analysts expect an increase in cost inflation at Japanese companies, compared to a global average of over 50 per cent. This reflects the central bank’s failure to reach its 2 per cent inflation target despite several years of negative interest rates. 

The expected economic drag from protectionism will fall this year with US President Joe Biden’s administration coming into office. An analyst who covers car manufacturers notes: “I would expect Biden's approach to be less aggressive on this front than the previous administration.”

Asia Pacific (exlcuding China and Japan): Coming out of the crisis stronger

Companies in the Asia-Pacific region, excluding mainland China and Japan, are slowly but steadily moving out of the Covid-19 crisis with greater optimism, improving margins and stronger balance sheets. The region’s pace of recovery, though slower than mainland China’s, is faster than the rest of the emerging world.

Relatively good control of the virus in the region’s economic powerhouses like Singapore, South Korea and Taiwan has helped to boost confidence. Supply disruptions in Western countries have brightened the region’s short-term export outlook. A consumer discretionary analyst notes: “The economic recovery and consumer demand has been stronger than expected, especially in India, in spite of recent global lockdowns.”

Nearly 70 per cent of analysts covering the Asia-Pacific region report management teams are feeling increasingly confident to invest this year, while nearly 60 per cent expect dividends to rise. Optimism has significantly improved from the first three quarters of 2020, and companies are forecast to boost capital expenditure and hire more workers over the next 12 months. 

A materials analyst covering the regions adds: “With rising metal prices and spreads, cash generation has improved significantly, leading to stronger balance sheets and therefore a higher ability to invest for future growth.”

As the recovery picks up, earnings margins are projected to expand in the region over the next 12 months. About 30 per cent of analysts expect that pricing power will strengthen.

Overall leverage is expected to decrease this year, with fewer companies needing to raise capital. The proportion of companies with fundraising needs has dropped to 19 per cent in 2021 - the lowest among regions except Japan - down from 34 per cent last year. “Many companies have already raised capital or have excess cashflows from Covid which can be used to reduce debt,” reports a healthcare analyst.

But the region isn’t immune to risks, and further Covid-19 lockdowns and ineffective vaccines leading to slowing growth are among those most commonly cited by analysts.

Emerging Europe, Middle East, Latin America: Recovery weak and slow

Given the uneven impact of Covid-19 and the differing approaches to controlling it, there is understandably a good deal of variation in the prospects of the companies within a region that includes Eastern Europe, the Middle East, Africa and Latin America. 

Overall, our analysts report sentiment is improving, but optimism is lower than in other regions. A financials analyst sums it up as follows: “The resurgence of Covid-19 cases has dented management outlooks across the board.” Only 43 per cent of our analysts covering the region report management teams are feeling more confident about the year ahead than last year, compared to a global average of 62 per cent.  

Weak public health infrastructure and a general lack of vaccine capabilities have hindered efforts to normalise economies in the region. When asked about the stage of recovery, 57 per cent of analysts report their sector is in the ‘initial expansion’ stage, compared with 34 per cent globally.

Funding costs will drop in line with the global trend, and default rates are projected to decline over the next 12 months. The utilities sector may benefit from cheaper money going after sustainable projects. Borrowing costs “could potentially decrease further due to popularity of ESG-friendly projects”, notes one utilities analyst, while another adds: “The energy transition has created major capital expenditure opportunities for the sector.”

Market consolidation may accelerate against the backdrop of economic weakness. About 85 per cent of analysts see mergers and acquisitions becoming more prevalent in EMEA/Latam over the next 12 months, the highest among all regions, comprising primarily bolt-on deals rather than major strategic acquisitions. 

Analysts cite public health and the general macro environment as the main risks to the outlook, while better cost management and successful post-pandemic M&A are among the reasons given for potential positive surprises.