Fidelity International's latest report: Challenges test company resilience

Recently, Fidelity International published a new report, syncing our fans.

A year on from the shot in the arm provided by the arrival of vaccines, overall, companies

are entering 2022 in a position of improved financial strength and still-positive management

sentiment, according to the 156 Fidelity International analysts surveyed about coming trends.

However, pandemic fallout, market weakness and a spaghetti junction of other challenges will test their resilience in the coming months.

On the plus side, the survey (which was carried out in December 2021) indicates that leverage will continue to fall, alongside overall debt and defaults, as the recovery continues. Longer-term, our analysts believe firms will seek to bolster their resilience by investing in new technologies and shortening supply chains. Such defences will be needed for the challenges ahead, including the higher funding costs our analysts expect as central banks pursue a course of financial tightening. Companies also face a potentially shorter business cycle, increased inflationary pressures, having to make the tradeoffs needed to achieve net zero, and risks from a more volatile geopolitical outlook.

With vaccine programmes now in full swing, many managers see a path out of pandemic-related

uncertainty in 2022, say Fidelity analysts. Globally, 54 per cent of survey respondents report that company managers are moderately or significantly more confident about making investments over the next 12 months, with only 9 per cent saying confidence has fallen. This is less bullish than the annual survey reading last year when vaccine optimism was at its height, but is consistent with further recovery from Covid-19 over the medium term, albeit with some risks to growth and shorter-term sentiment. Optimism is highest in North America, with 63 per cent of analysts reporting increased confidence, while Asia Pacific (ex-China and Japan) and Europe follow closely with 62 per cent and 61 per cent respectively.“Higher visibility on the Covid vaccine rollout and broad strength in commodity prices should improve confidence to invest over the next 12 months compared to the last 12 months,”reports a North America analyst.

Among sectors, management teams in industrials, tech, financials, and consumer discretionary companies are the most confident about investing in their businesses. A Europe fixed income consumer discretionary analyst says:“After pandemic closures in 2021 and continued variant uncertainty, management will be much more comfortable investing in 2022, certainly in the second half of 2022.”

Policy pivot could lead to higher funding costs recede, so will the policy measures designed to keep the economy afloat. Some 67 per cent of analysts globally expect pricing pressures to be higher in 2022 than 2021, and central banks will be forced to respond to rising inflation.For companies, this policy pivot may mean higher bills to service debt, and, as a result, more analysts now expect funding costs to rise than to fall. This means that, while the majority expects funding costs to stay the same, the weighted net responses of analysts show a rise in expected funding costs for the first time since 2019.This is particularly marked in the telecoms sector, where 60 per cent of analysts anticipate funding costs will rise. Consumer discretionary analysts report the biggest shift in expectations (in terms of weighted net responses), from decreasing costs last year to rising costs this year. A North America discretionary retail analyst says:“Companies got very cheap financing away in 2021 and with the Fed looking to raise rates, funding will become more expensive generally in 2022.”

Fortunately, many companies have increased their balance sheet resilience. Default rates are expected to fall, with one in five analysts expecting fewer defaults globally this year, compared with 7 per cent that anticipate an increase.