About half [48.2%] of Fidelity’s research analysts believe the companies they cover will derive future growth from outside their home country/ region. Of these, China was overwhelmingly selected as the major source of that growth. ‘Other Asia’ was the next most popular source of growth [11%], followed by Latin America [8%] and then the core Eurozone [5%]. Perhaps surprisingly, India only registered with 4% of companies as the one major source of future growth.

Matthew Sutherland, Fidelity Worldwide Investment’s Head of Research – Asia Pacific, said: “Asia is still thought to be a major source of growth because even a hard landing in China is better than the best case scenario in the west, China’s economy is migrating from one driven by capital formation to one driven by consumption. This change will take time, but explains why companies are now looking at Asia, and China in particular, as a new consumer base rather than a place to shift operations to cut costs. The risk, however, is that if the Asian consumer disappoints, there isn’t really a plan B.”

From a global perspective, Asia is a more important region to more companies than either Europe or America. About 38% of companies are ‘very reliant’ or ‘entirely reliant’ on the health of the Asian economies, whereas 29% are very reliant or entirely reliant on developed Europe.

More than 110 of Fidelity’s equity and fixed income research analysts in Europe and Asia were surveyed. 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.

China becoming more expensive
Seeing ‘Made in China’ on many manufactured products is likely to be on the wane over the next few years – double the amount of companies will be looking to ‘offshore’ operations to SE Asia [26%] than will be looking to offshore operations to China [13%].

Mr Sutherland said: “Wages in factories and, to a lesser extent, rural enterprises have risen significantly in the recent years – perhaps as much as 100% from 2003 to 2008 – as factory labour has become scarcer and the forces of urbanisation have whittled down rural labour stocks.

“It is apparent that China is maturing rapidly as an economy and that as wage costs there continue to rise – labour costs are now only 14% more expensive in Mexico compared with a 240% difference a decade ago, for example – companies are starting to look elsewhere.

“Companies will continue to offshore to reduce costs but the destinations of that new investment are changing – more so for European companies than Asian, perhaps reflecting their higher cost base.

“For Asian companies, South-East Asia will be by far the biggest beneficiary of this followed by China at 13%. For European companies, though, India beats China and SE Asia as the top destination for offshoring. This reflects the fact that Asian companies are offshoring manufacturing, while European companies are offshoring services,” Mr Sutherland said.

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).

This document is issued by FIL Investment Management (Australia) Limited ABN 34 006 773 575, AFSL No. 237865 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS is available at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is Perpetual Trust Services Limited (“Perpetual”) ABN 48 000 142 049. Perpetual is not the publisher of this document and takes no responsibility for its content. Reference to ($) are in Australian dollars unless stated otherwise. 2011 FIL Investment Management (Australia) Limited.   Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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CEOs of global companies are more concerned about government intervention and intrusive regulation than they are about inflation, wage costs, pricing issues or even their own balance sheets, according to a survey of Fidelity Worldwide Investment’s research analysts.

A survey of more than 110 of Fidelity’s research analysts in Europe and Asia, conducted last month, shows that only concerns about sales volumes are causing more corporate anxiety than the likelihood of  governments enacting or changing legislation or regulation that will result in a more challenging business environment. 

As each research analyst speaks with the senior management of an average 30 listed companies at least 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.

Matthew Sutherland, Fidelity Worldwide Investment’s Head of Research – Asia Pacific, said: “Government interference in the free market for goods and services is a perennial concern for companies. However, it is running higher than usual now due to governments’ new religion of balancing budgets, which could cause them to seek revenue opportunities through new tax schemes.

“Also, a world of competitive currency devaluations potentially leads to trade wars, quotas, tariffs and other destabilising influences. 
“Additionally, governments such as China’s are increasing their tendency to micro manage business in order to achieve macro goals, particularly in the banking, property and environmental areas.

“Despite this, it is clear that if we can get some strong leadership from politicians and more confidence that the sovereign debt crisis in Europe can be brought under control, the corporate world is in good shape to fuel an economic recovery.”

The survey has found that the crisis of confidence within senior corporate ranks is not just a theoretical issue; it is causing corporates around the world to resist increasing their spending despite the recovery in their balance sheets compared with 2008/09.

Regulatory risk /government intervention are most feared in the Healthcare and Utilities sectors, even more so than by bank CEOs. Mr Sutherland said: “The balance sheet improvement isn’t filling corporates with confidence – they are keeping their hands in their pockets. Cash-rich companies in Asia ex-Japan alone are sitting on around US$1 trillion in cash. At the moment most seems to be going the way of dividends – cash payout ratios are set to increase from 12% in 1998 to 32% in the next year.”

Olivier Szwarcberg, Head of Credit and Structured Research – Europe, said: “The balance sheets of both Asian and European companies are considerably healthier than in 08/09 but CEOs are reluctant to spend their cash-flows as political and economic uncertainty continues.

“In fact, in 88% of cases, Fidelity’s research analysts believe that the companies they cover have stronger balance sheets than in 2008/2009, indicating that important lessons were learnt in the last financial crisis.

“Such relatively healthy balance sheet fundamentals are out of line with corporate debt valuations, with credit markets effectively pricing in outright recessionary fundamentals.”

Henk-Jan Rikkerink, Head of Research – Europe, said: “According to the survey results, most global corporates are planning on reducing or keeping constant their capital expenditure [71%], freezing spending growth in IT and marketing [68% and 62% respectively], and keeping employment levels constant [only 29% intend to actively recruit].

“Clearly there is a lack of conviction amongst CEOs that governments will leave them alone or that a global recovery is underway, and recent events have proven them right to be cautious on both fronts. Healthcare and utilities companies, in particular, fear intervention. The former have been hit in recent weeks by government restraints regarding reimbursement, for example, while utilities have been hit by tax increases.

“A dose of corporate Prozac, as well as clearer outcomes from our governments, are required to kick-start the corporate spending which could help spark a global economic recovery.”

Digging a little deeper into the survey results, there are regional differences. In Asia Pacific, Fidelity’s analysts believe that 32% of companies are looking to increase their capex by 10% or more in the coming year compared with last year, with 9% looking to increase their spend by over 20%. In Europe, only 21% of companies 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%.

Mr Rikkerink said: ”While the gap between Asian and European capex expenditure may not look significant at first glance, it is important to remember that European companies are starting from a much lower base than their Asian counterparts as capex spend in Europe has been extremely low for two to three years now. What this does mean, however, is that when companies feel confident enough to loosen their purse strings, the reversal back to the norm will look like an explosion of activity.”

In addition, the majority of companies in Asia and Europe are not interested in M&A activity as a strategic option. Mr Rikkerink said: “Investment bankers be warned – our analysts expect companies to stick to their knitting over the next year. They believe that approximately 84% of companies have either dismissed M&A entirely to drive growth or are only considering it on a small scale.

“While at first this may seem surprising, the results are consistent with other evidence suggesting an end to the excessive M&A era: lower returns from private equity funds, less successful IPOs, higher capital requirements from banks to name a few. Companies just don’t want to take a risk with their balance sheets at this time. The small amount of M&A activity we are likely to see should come from the Technology, Telecoms and Media sectors, and this should be in the form of small ‘bolt-on’ acquisitions rather than mega deals,” Mr Rikkerink said.

Short-term funding could still be a problem
A reason for the reluctance to spend out of cash-flows may be the reliance on short-term funding. While Fidelity’s fixed income analysts are fairly confident that the majority of companies could ride out a short-term dislocation in capital markets, the survey found that approximately a third [31%] of cases, analysts believe some companies may not, being reliant, very reliant or entirely reliant on short-term financing.

Should there be a major dislocation in capital markets, 6% have no other sources of funding and 27% have only one other source of funding, or it is likely to be expensive. Asian companies, financials and utilities companies in particular believe they would have to pay a high price. In contrast, healthcare companies seem to have the most choice when it comes to alternative sources of funding.

Mr Szwarcberg said: “One of the things we put more importance on now is the ability of companies to fund their activities and growth. This is not a simple task, requiring in-depth research and understanding, but it can be the difference between one company surviving a credit crunch and another not.”

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).

This document is issued by FIL Investment Management (Australia) Limited ABN 34 006 773 575, AFSL No. 237865 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS is available at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is Perpetual Trust Services Limited (“Perpetual”) ABN 48 000 142 049. Perpetual is not the publisher of this document and takes no responsibility for its content. Reference to ($) are in Australian dollars unless stated otherwise. 2011 FIL Investment Management (Australia) Limited.  Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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