Gap in the ‘two-speed global economy’ likely to widen

Asia more protected than Europe against further economic downturns, Asian corporates planning to invest more than those in Europe.

Large Asian-based companies expect to employ more, spend more, and pay higher wage increases in the next two years than their European counterparts, according to a Fidelity Worldwide Investment survey.

More than 110 of Fidelity’s equity and fixed income research analysts in Europe and Asia responded to the survey conducted in October. As each research analyst speaks with the senior management of 30 listed companies on average every quarter  – a key part of Fidelity’s ‘bottom-up’ fundamental investment process –  the survey reflects the thoughts of thousands of CEOs and other top management at listed companies in Europe and Asia.

Notwithstanding the dour economic conditions, Fidelity’s research analysts believe that as much as 29% of companies are looking to ‘actively recruit to increase headcount’ over the next two years, while only 8% will be looking to actively make redundancies.

At a regional level, the analysts stated that 66% of Asian corporates are ‘actively recruiting’ or ‘looking to grow organically’, compared to 48% in Europe. At the other end of the scale, 16% of European corporates are expected to ‘actively make redundancies’, compared with 0% in Asia.
Asian companies are also looking to increase their spending on marketing at a greater rate than European companies, indicating they are expecting more of a growth path. 

Sabita Prakash, Head of Asian Fixed Income said: “There is already a two-speed global economy. The more positive growth expectations in Asia compared with Europe are likely to become a self-perpetuating fact, prompting higher spending on new headcount and marketing. This spending will further stimulate Asian economies.

“European companies are clearly reducing fixed costs in the midst of the global financial and economic uncertainty.

“Perhaps unsurprisingly in the current climate, banks and other financial institutions are a clear outlier when looking at future hiring intentions.  Close to a third of all banks [30%] are expecting to actively make redundancies in the next two years.”

Despite the hard economic times, Fidelity’s research analysts said that overall 44% of companies are expecting their nominal wage cost increases to be higher than 3% over the coming two years, with Asian corporates more likely to reward staff with higher pay rises than their European counterparts.

Ms Prakash said: “Wage inflation is expected to increase despite the fact that companies find no shortage of appropriately skilled workers and are even reducing headcount via organic reductions or active redundancies. This could fuel inflation at a time when growth expectations are stagnant in much of the world.”

In a more encouraging twist for Europe, 21% of companies there are looking to increase their capex by 10% or more in the coming year compared with last year, with 5% of companies looking to increase their spend by over 20%. European companies are also likely to increase their spending on information technology infrastructure to a greater degree than in Asia.

Ms Prakash added” “Overall, the survey suggests that Asian companies should be better protected against economic woes in the western world as Asian exposure to the US and Europe is much lower. Only 36% of Asian companies are reliant on the health of the US compared with 69% of European companies, and only 25% of Asian companies are reliant on the health of core Europe compared with 88% of European companies.

“The two-speed world is likely to continue, though Asia will only gradually decouple from the US and Europe as capital flows become less controlled and more efficient,” Ms Prakash concluded.

About the survey
114 analysts (90% of Fidelity’s analysts across Europe and Asia) responded to the survey in the period 3rd to 12th October 2011. The regional split of analysts was 58 from Europe and 56 from Asia (inc Japan).

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