Overview
The outlook for management sentiment and leading indicators is stabilising following a period of rapid economic recovery. Our latest monthly survey of Fidelity International analysts shows that expectations for global management sentiment over the next six months have started to moderate, while a growing proportion of analysts expect costs to rise throughout the course of the year.
Our monthly survey asks analysts about their outlook for management sentiment and forward-looking leading indicators of activity over the next 6 months. When we first started asking the question on a monthly basis last July, companies were emerging from a period of unprecedented turbulence. This explains why the outlook for sentiment was at elevated levels last year and was always likely to fall as the pace of economic recovery started to slow.
Analysts covering Chinese companies appear the most pessimistic, with almost a quarter expecting management sentiment to decline over the next 6 months. China was the first to enter the pandemic and the first to exit it, meaning that any moderation in sentiment is unsurprising. “The cycle is maturing,” points out one analyst covering Chinese technology companies. “Unbridled optimism is evolving into a more a neutral outlook.”
Rising costs dampen sentiment
Rising costs are feeding into falling sentiment, with one analyst covering European financials reporting that the general outlook is “slightly weaker due to fears about inflation, peak growth, and a resurgence in Covid-19 cases.”
Higher costs can impact management sentiment by depressing profit margins, although some companies are not as affected as others by rising prices. One analyst covering European industrials reports that most of the firms in her sector “have the capability to absorb most (if not all) negative wage and logistics inflation through internal cost cutting”.
But profits have suffered in some sectors. One analyst covering European consumer staples firms reports that rising raw material prices created “a near-term headwind and a hit to profit margins in the first half of the year.”
North American companies are particularly exposed to rising costs and just under 80 per cent expect non-labour costs to increase over the next 6 months. Delays at American ports partly explain this, with one analyst covering tech companies in the region reporting that the “supply chain challenge has become more serious and hasn’t lifted yet.”
While inflationary pressures can impact margins, the higher demand driving up prices in some cases can also act as a counterbalance. “Commodity cost inflation pressure has been partly offset by strong demand and sales,” reports an analyst covering Chinese utilities.
The pace of recovery is slowing
Inflationary pressures are not the only reason that management sentiment has moderated; many companies are also concerned about slower growth. “Rising costs contribute a bit to my view on weaker leading indicators but are probably only part of the wider story,” reports one analyst covering European metal and mining firms. “Another element that is likely even more prominent is fears over China and the strength of demand there.”
Despite this and a rise in cases due to the Delta variant, we expect fiscal stimulus and still loose monetary conditions, plus a further rollout of vaccinations, will help keep conditions relatively benign, if not growing as quickly as before.
