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Share price highs reflect confidence on shop floors

Ed Monk, Fidelity Personal Investing, 20 March 2017

A new intra-day high for the Footsie on Friday will have done little to ease the nerves of contrarians struggling to reconcile record share prices with an apparent catalogue of economic risks.

The blue-chip FTSE 100 index eased back this morning but remains above 7,400. This as the world frets about Trump, Brexit, inflation, rising rates and the rest.

Pessimists will be proven right one day of course - volatility and market falls are part of investing life - but they may have to wait a little longer. For all the reasons to be fearful, and there are reasons, investors’ current positivity is not entirely unfounded either.

Fidelity International recently concluded work on its annual analyst survey for 2017, reflecting sentiment among our analysts across the world who conduct around 17,000 company meetings throughout the year.  From that vantage point, they have unique knowledge of the mood among bosses and finance directors - the people who do the hiring, the spending and gauging of demand among consumers.

The survey is a comprehensive and fascinating piece of work and will be the subject of the latest MoneyTalk podcast, out later this week.

The results show management confidence as now being net positive - it had turned negative heading into 2016 - and at its highest levels since 2014. Sentiment is warmer now than a year ago in every sector bar consumer discretionary, where it is less positive, and consumer staples, where it remains equally as positive as a year ago.

Commentary accompanying the survey explains: “Encouragingly, our analysts are much more optimistic about 2017 than they were for 2016. With the oil price lows now behind us, oil-price sensitive sectors and regions are bouncing back strongly from last year’s lows. This, combined with evidence of modest demand growth and continued innovation across sectors, is driving higher levels of investment and activity, which has also been reflected in firmer macroeconomic data.”

This positivity is important because it suggests company managers are becoming more willing to invest in their businesses, confident that consumer demand exists to reward that investment. This, in turn, can improve profitability and returns on capital invested.

This can lead to various positive outcomes for investors. It will comfort income investors that a majority of developed markets analysts are expecting further dividend growth this year, while emerging markets analysts are leaning towards stable dividends.

Remarkably, not a single developed markets analyst predicts dividend cuts for their sector as a whole.    

A majority of analysts everywhere see continuing merger and acquisition (M&A) activity, while the demand growth, recovering returns and dividend confidence, in combination with contained funding  costs, also make it likely that share buyback programmes will remain popular, particularly in the US.

With this sunnier outlook, the recent highs for markets are perhaps explainable. It would require bravery to argue strongly that equity indices, many of which are hovering near all-time highs, have much further to go, but the underlying fundamentals which tend to drive market performance in the long term appear robust.

Whatever markets bring, individual investors can give themselves a smoother ride with a proper spread of diversified assets, bought on time horizons that give losses a chance of recovering and with an eye on cost.

Our Select 50 list of recommended funds includes many investing globally, where the funds’ managers will spread money across different regions, providing diversification.

Rathbone Global Opportunities is a strong recent performer and has most exposure to the developed markets of the US, UK and Europe. It’s also one of Fidelity Investment Director Tom Stevenson’s picks for 2017.

For dividend hunters, Fidelity Global Dividend invests across the world with a focus on shareholder pay-outs.   

Aviva Investors Multi-Strategy Target Return invests not just globally but across various asset classes as a means to reduce volatility.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Please be aware that past performance is not a guide to what might happen in the future. The Select 50 is not a recommendation to buy or sell a fund. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

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