This month’s survey of 146 Fidelity International analysts reveals the profound impact the coronavirus crisis will have on companies’ approach to social issues. Over half the responses indicate that companies will step up their focus on workers, consumers and the wider community as a direct result of the pandemic.
The health of staff has been at the forefront of company managements’ minds, and analysts from just about every region and sector confirm that companies will devote more attention to employees’ safety and wellbeing in the future. But the changes will be deeper and broader than that.
Our analysts report that European telecoms companies have been offering free data or devices to people in vulnerable demographic groups and have been offering support to governments and hospitals. A North America IT analyst reports that companies in her sector are working with governments to ensure healthcare providers are first in line for technical equipment. European consumer staples firms are increasing their involvement in public hygiene initiatives, while some materials firms are taking the opportunity to enhance links with local governments.
Healthcare and pharmaceutical companies are acutely aware of their central research and development role in the global pandemic. Many are keen to avoid the perception of profiteering, and, at least temporarily, this may undermine the bottom line.
A North America pharmaceuticals industry analyst writes: “Many of my companies are now developing vaccines, and with plans to distribute the vaccines (at least initially) at cost [price]. This could obviously be a large positive for ESG perception for the sector, and may divide the more ethical players versus those trying to profit from the situation.”
One consistent message across many sectors and regions is a new focus on employees. This takes the form of improved safety, partly in response to the pandemic, but also a longer-term effort to improve employee satisfaction with better conditions and, in some cases, higher pay.
The survey responses demonstrate that the global virus pandemic will accelerate a wider move towards stakeholder capitalism. As one energy analyst put it, “larger companies are prioritising society and employees over shareholders.” A consumer discretionary analyst covering Europe adds: “The crisis has highlighted that demonstrating good corporate citizenship and support for the communities in which the sector operates is now an essential part of building and sustaining brand equity.” How persistent the post-virus changes prove to be, and whether additional costs will depress margins, will emerge in the months to come.
Situation still very challenging
Other parts of the survey reveal that the current environment is still very challenging for companies. Cuts to earnings forecasts are about as large as those expected last month, whether the disruption abates from here or continues for the rest of the year. Our analysts also forecast more pain for employees - workforces are set to shrink by a further 7 per cent in the next six months.
Meanwhile, the proportion of analysts who expect the decline in demand to be permanent, rather than temporary, has edged up from 39 per cent to 45 per cent globally. Europe may suffer the most, with 62 per cent of respondents expecting demand destruction. In materials, that proportion increased from 44 per cent in April to 56 per cent this month. One European materials analyst says: “Issues are shifting from a supply shock (mines shutting) to a demand shock (mines reopening but downstream demand much lower).”
Winners and losers beginning to emerge
However, underneath the averages, dispersion is rising both among and within sectors. While expected earnings cuts are little changed from last month overall, variation is starting to emerge between sectors and regions as the extent of the downturn becomes clearer. Consumer discretionary and industrials analysts are more optimistic than last month, while financials analysts are less so. And behind the average drop in workforce size, lies a very wide range between those analysts expecting a 50 per cent reduction to those expecting a 30 per cent increase.
The proportion of analysts expecting the pandemic will have a negative impact on earnings has fallen to 85 per cent from a peak of 91 per cent last month, indicating that negative sentiment is at least stabilising and has perhaps already peaked. A consumer discretionary analyst reports that his discussions with companies have moved on from the level of cash burn during shutdown to understanding the trajectory of recovery when things re-open.
The rising optimism among consumer discretionary analysts is particularly interesting because the sector has been hit hard by lockdowns enacted to curb the virus’s spread. As these measures are gradually relaxed, many companies within the sector are beginning to understand a potential road to recovery and guidance from company managements reflects this.
A China consumer discretionary sector analyst notes: “The situation reached the bottom in April, and as Mainland China is gradually relaxing the quarantine rules, the demand situation is expected to improve from mid-May.” “Sentiment has improved on the sector, stores are beginning to open in certain states and aggregate spending seems to have bounced off the bottom with stimulus,” adds a North America consumer discretionary analyst.
However, even within the sector, there is considerable variation. A Europe fixed income analyst covering hotels and restaurants reports: “In the past month it has become clearer that returning to normal in this sector will not be a 2021 event but more likely 2023 or beyond. Near-term full shut-downs have also been extended, so the worst part of the crisis is becoming worse.”
The theme of winners and losers beginning to emerge echoes throughout the survey responses. Those firms with an existing online capability have done and will continue to do better than those without. To be online is to be in demand and the information technology and telecoms sectors are benefitting from the lack of human movement. This is a trend that may outlive the Covid-19 crisis, as one Europe equity IT services analyst reports: “Longer term, I think it drives IT adoption.”
Not quite the turn
More analysts report that leading indicators in their sectors are positive this month compared to last month, a sign that while conditions might be harsh, at least some optimism is slowly building. It might be too early to call this the turn, but analysts are reporting that companies are beginning to set their sights on a strategy for recovery. China is still ahead in this respect, but other regions are starting to show signs of life too.
The survey was conducted between 6-11 May and featured 205 responses from 145 analysts around the globe (analysts who cover more than one sector or region take the survey more than once).
What question should we tackle next?
Email your suggestion email@example.com
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.
ED20 - 165