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Fidelity: Consumer sector in developed markets offer opportunity

The consumer sector in developed markets is liable to be “the incremental driver of growth” in 2016, Fidelity International said.

Based on views from 200 equity and fixed income analysts as part of an annual survey, the firm said consumers’ purchasing power is expected to benefit from low energy prices and a generally low inflationary environment.

Within the survey, the consumer sector averaged a score of 5.6 on Fidelity’s sentiment indicator, which is more than 10% higher than the all-sector average. The sentiment indicator scale ranges from one to 10, with 10 the most positive.

New economy sectors are better than old economy sectors in terms of their outlook, as oversupply will depress capital spending, Henk-Jan Rikkerink, global head of research at the firm, told reporters at a media briefing.

“Our most important new theme this year is the relative robustness of the consumer sectors compared to many others,” he said.

Energy, materials, industrials and utilities represent  “large swathes of the economy” and they are buffeted by low commodity prices and a global decline in capital expenditure, so it may require a longer period  of capital scarcity to restore the capital and cost discipline necessary to bring equilibrium to supply and demand, he said.

“While this is going on, it is crucial that the service side of the economy holds up if a global recession is to be avoided later in the year.”

Innovation is key

Fidelity is also aware of the importance of innovation in a low nominal growth environment and the survey sees the impact of innovation across almost all sectors and markets, especially in healthcare and IT, he said.

“The sector that scores highest on the direct impact from disruptive technologies is IT. New technologies are disrupting the landscape faster than ever, reshaping revenue pools across a number of industries and creating a host of opportunities,” he said.

On financials, the survey’s findings indicate that the sector’s fundamentals are changing and they are going to have stronger balance sheets and lower leverage under the influence of belt tightening and regulatory nudging.

“Financials still face some important risks, including a softer growth and inflation outlook, various forms of exposure to the energy sector, and lower bond market liquidity. Any weakness in financials can also lead to further softness in the real economy due to transmission mechanisms that can make market concerns self-fulfilling,” Rikkerink said.

Positive on Japan, China to remain slow

When looking at the regional trends, the firm said Japan is again viewed as the best in class in this year’s survey with a positive sentiment score of 6.3, albeit lower than the 7.1 score it achieved in 2015, supported by views from analysts that corporate reform will have a positive impact on the economy.

On China, its sentiment indicator dropped to 4.1 from 4.4 in 2015, as the country’s domestic corporate climate is worsening, with 71% of analysts reporting less management confidence to invest in their business in 2016, according to the survey.

“This is not out of line with market expectations for a continued slowdown in growth in China, as the investment-export growth axis slowly gives way to consumer-driven growth forcing large-scale adjustment in the manufacturing part of the economy,” Rikkerink said.

The firm is also a little more cautious on Europe and the US, as the company fundamentals will remain comparable to their 2015 conditions, but the situation across emerging markets does not look good, as these economies – including those in the Middle East, Africa and Latin America — are more reliant on commodities.

Part of the Mark Allen Group.