July’s Fidelity Pulse Survey: Falling costs find some support

By Martin Dropkin, Global Head of Research, Fixed Income
 Fiona O'Neill, Director, Global Equity Research and Sector Investing
 Ben Moshinsky, Editor-at-Large

More than a third of the 196 responses (analysts that cover more than one sector take the survey once for each) expect non-labour input costs to decline in the next six months, as a global average, compared with 18 per cent expecting an increase.

However, there are some signs that costs are finding support levels in some parts of the global economy, with 57 per cent of materials analysts expecting an increase in non-labour costs. And, looking regionally, almost a third of China analysts expect the same.

Analysts reporting wage costs will fall in the next six months outnumber those expecting an increase by two to one, except in Europe where the quarter of analysts expecting wages to increase is matched by those expecting a decrease. However analysts expect the global workforce to shrink by just 4 per cent in the next half year, suggesting there may be less slack in the labour market than previously thought.

Results diverge by sector. Costs in the energy industry are declining partly due to a lack of pricing power for energy servicing companies, according to a North America fixed income energy analyst, with limited risk of inflation until the start of next year at the earliest.

Looking more closely at the materials sector, the expected uptick in costs is “mostly tied to an edge up in oil and the fact the forward curve is upward sloping. This is particularly relevant in the chemicals sector,” a Europe-based materials analyst noted.

Higher oil prices lead to higher petrochemicals prices. But whether these costs will lead to margin pressure or bleed into the wider economy depends on the type of raw material in question, as the manufacturers of commoditised products wield less pricing power than those of more specialised products.

The trend is set to continue into the second half of the year, when pent up demand combines with low inventory levels to create “some tight markets”, the analyst said. The sector is split between mining, chemicals and steel, with the outlook appearing weakest for the latter.

A North America healthcare analyst said that “high frequency data [had] pointed to green shoots of recovery before [a] surge in US cases rattled confidence,” while a colleague covering pharmaceutical companies noted that “given most companies assumed Q2 would be the trough, and H2 would see normalisation, this could be a risk.”

In contrast, a Europe consumer discretionary analyst, focusing on apparel and luxury goods said that their companies “are generally slightly positively surprised at the recovery in demand since re-opening.”

Despite management sentiment in the consumer discretionary sector showing some signs of optimism (56 per cent of analysts report an improvement in sentiment this month) any revival is a sign of a gradual recovery from very low levels. “I want to caution that the strong improvements in trends are from a very low base in Q2 2020,” said a North America analyst covering hotels, restaurants and gaming, adding: “I am still expecting a slow return to pre-Covid levels [that] could take multiple years.”

Sentiment in the energy sector tells a similar story, with 56 per cent of analysts noticing an improvement in management sentiment this month. However, optimism is not high in absolute terms, and 78 per cent of analysts expect a fall in year-on-year revenue growth over the remainder of 2020. We note a new sense of perspective in some responses. “From a US point of view,” said one energy analyst, “it’s gone from generationally disastrous to just quite bad.”

Finally, the financial sector is the only one where more analysts report leading indicators are negative than are positive – and this has been consistent for the past four months. Fifty-seven per cent of analysts expect revenues to decline in the next six months, due to “an expectation of more muted medium-term growth rates which might weigh on the market and asset class returns for investors in all segments,” according to a North America financials analyst.

Beyond the financial impact of the pandemic, there is evidence of cultural change, with workforce diversity rising up the priority list in Japan, Europe, EMEA/Latam and North America.

In Japan, the focus is on gender diversity, with the majority of analysts reporting evidence of attempts to improve the gender balance in companies. Meanwhile, in North America, around half of analysts report an increasing focus on ethnic diversity, as company managements digest the impact of the Black Lives Matter movement.