Region – China, Japan & other Asia-Pacific
Region – China, Japan & other Asia-Pacific
China - Revving up while rebalancing
Sentiment indicator 6.4 vs 5.7 last year
Analysts see signs this year that China’s economy has turned a corner, with management confidence across a range of indicators rising to multi-year highs.
The overall sentiment indicator rose to 6.4 from 5.7 last year, the biggest increase for any country or region in the survey. While this remains below the global average indicator of 6.6, fears that China’s economic growth could hit a wall appear to be fading. Almost nine in ten of all our analysts globally say management teams at the companies they cover are not concerned about a ‘hard landing’ in China.
For the first time in four years, expectations for new capex spending in China has turned positive - one of the sharpest turnarounds seen in the survey. Management across a wide swathe of sectors is shifting from maintenance to growth capex, reflecting the increased optimism in the world’s second largest economy and the drive to innovate and upgrade domestic value chains.
Against this bullish outlook, Chinese companies are ploughing ahead with plans to borrow to fund their expansion plans. A third of analysts - more than anywhere else - expect corporate leverage to continue to rise. This is despite the fact that companies anticipate higher costs of funding this year, according to 62 percent of China analysts. That’s much higher than for the United States, where only a quarter analysts see funding costs rising.
Despite somewhat tighter liquidity, China is benefitting as it emerges from years of deflation in industrial prices. The rebound in global commodity prices over the past year has helped - China ranks as the world’s biggest producer of a number of core commodities including copper, iron ore and aluminium. Companies are also starting to see flow-through benefits of government-led efforts at supply side reform, which have delivered targeted reductions in overcapacity across a number of major industries, such as steel.
Challenges remain. China’s rising affluence, aging population and shrinking work force have combined to push up wages. Globally, 72 per cent of respondents to the analyst survey expect wage increases for their companies, the highest such number in the past five years. China is leading the way, with 86 per cent of analysts expecting wage increases for their companies.
But while growth has been slowing in recent years, and directionally this is unlikely to change, this slowdown is expected to remain steady. Globally and in every region, a large majority of analysts expect China’s growth to remain stable.
Average responses per sector. Source: Fidelity Analyst Survey 2018.
Japan - Reaping the fruits of Abenomics
Sentiment indicator 7.0 vs 6.4 last year
First the bad news: despite five years of Abenomics, Japan’s wage growth remains low and inflation is still well below target.
The good news is that unemployment is at the lowest levels since the mid-1990s and corporate profits are at record highs - just a few of the many signs that the Japanese economy has improved significantly in recent years.
With a sentiment indicator of 7.0, our analysts are more bullish on Japan than any other country or region in the survey. The country’s top marks were bolstered by corporate finances that are in rude health and expectations of stable or increasingly generous dividend payouts.
Nobody tops Japan when it comes to being conservative about balance sheet management: 47 per cent of respondents said balance sheets in Japan were very safe and cautious, while an additional 20 per cent stated balance sheets were modestly cautious. Part of the credit can go to governance reforms under Prime Minister Shinzo Abe’s economic overhauls, which have helped to enhance capital efficiency and boost shareholder returns to record levels. This improvement looks set to continue: almost half of our Japan analysts predict increasing returns on capital this year.
However, expectations for wage inflation aren’t as widely shared as elsewhere. Japan ranked lowest among countries and regions in the survey with only 54 per cent of analysts seeing moderate or strong wage increases this year.
In keeping with this finding, there appears to be little sense of upward pressure on prices. Only seven per cent of Japan analysts - the lowest proportion globally - say companies are expecting to hike prices by more than the rate of consumer price inflation. And inflation in Japan remains tepid: December’s 1 per cent annualised consumer price inflation rate represented a 33-month high.
Still, moderate price increases are meaningful for Japan, as the country shows signs of shifting away from a deflationary mindset that has held sway for years.
Average responses per region. Source: Fidelity Analyst Survey 2018.
Asia-Pacific, excluding China and Japan - Picking up pace
Sentiment indicator 6.2 vs 5.7 last year
Beyond Japan and China, sentiment across the rest of the Asia-Pacific region seems somewhat subdued compared with the rest of the world at 6.2 - but levels above five indicate that positive perceptions dominate negative ones. The headline finding constitutes notable sequential improvement within the region, which stretches from Australia to India, from 5.7 in the previous year.
As in China, companies in Asia-Pacific are dealing with somewhat elevated input cost inflation expectations. They also appear less bullish on dividend payouts, which only 34 percent of analysts for the region expect to increase, compared with a majority of firms in most other parts of the world (a notable exception is China, where only 29 percent of analysts see payouts rising).
The outlook for the region varies by sector. Anecdotally, the direction of regulation is expected to be a major factor for companies such as commodity producers, who experienced significant benefits over the previous year from regulations on anti-dumping or import duties, as well as from forced supply cuts.
Source: Fidelity Analyst Survey 2018.
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