Fidelity Worldwide Investment has released the findings of its third annual “Analyst Survey” which highlights some of the long-term themes that are expected to shape the global economy and investment markets in the years ahead.
The report explores the themes identified by more than 100 of Fidelity’s fixed income and equity research and fund management professionals across Europe and Asia Pacific. It is designed to shine a light on some of the companies, sectors, regions and secular themes that Fidelity analysts believe offer the most promising investment opportunities against a backdrop of debt reduction and consequently weak global economic growth.
The report identifies eight long-term investment themes of which the following are most common-place:
- An extended “Age of Deleveraging”. Companies around the world face strong headwinds as a result of public and private sector deleveraging. Unwinding debt is likely to be a multi-year process. This has important implications for investors. From an equity perspective, the current environment greatly adds to the appeal of reliable companies with robust balance sheets (without much debt) and good cash flows that can support healthy and growing dividends. However, the debt problem is not ubiquitous. Many less-developed countries have avoided the kind of debt accumulation that has become problematic elsewhere making emerging markets an attractive proposition in the long-term.
- A continuing search for income. In a low interest rate world, with ageing populations in many countries, income paying and capital preservation strategies will stay in demand, particularly for investors with longer-term horizons, such as pension funds.
- An ongoing place in investors’ portfolios for China. Chinese stocks have been some of the worst performers in Asia this year. However, we believe China remains an attractive long-term investment proposition due to several secular drivers, including increased urbanisation, a rising middle class and a shift from its export-driven economic model to a greater reliance on domestic consumption.
- More generally, consumption will continue to be a winning global theme driving global economic growth. Increased affluence and urbanisation in the past decade and the expanding middle class have underpinned the consumption theme. Quality brand names in the West will continue to compete for this new demand and benefit from its growth.
- A continued lack of correlation between investment performance and GDP growth. We live in a two-speed world divided broadly between high-growth emerging economies (high speed) and lower-growth developed markets (low speed). However, this does not mean that investors should turn their backs on developed markets. Select sectors in “low growth” countries may out-perform due to a range of unique factors. In Europe, for example, some multi-nationals with geographically-diversified earnings remain profitable despite the region’s recession. This confirms that investing based on economic growth alone can ignore the elements that determine total returns. These elements are often sector and company specific, requiring thorough bottom-up analysis that differentiates winners from losers.
- Innovation in technology & energy continue to be ‘game changers’, and is facilitating a developed market response to rapid emerging market growth. The shale revolution – as well as developments in social networking and smart phone industries – in the developed world will drive strong growth. For example, the US could reduce its dependency on foreign oil by two million barrels a day (or more) over the next five years because of developments in shale energy. This could have a significant impact on the broader US economy, reducing input costs materially, while reducing the US trade deficit.
Commenting on the findings of Fidelity’s latest Analyst Survey, Henk-Jan Rikkerink, Head of Equity Research, Europe says: “One of the principal features that differentiates our investment thinking is our ability to take a longer-term view than increasingly myopic, macro-driven markets.
“Our research process helps us to identify a range of long-term winners with strong fundamentals, which are likely to be beneficiaries of structural themes that act as a tailwind to earnings growth.
“These are typically stocks with a sustainable competitive advantage that enables them to deliver returns in excess of their long-run cost of capital and generate strong cashflow, some of which is returned to investors in the form of dividends.”
To read the report, click here.