China’s economy improves and analysts see clarity on the horizon

Before investing in 2023, something must be said that is vital to the basis of any analysis to be made: China’s economy has reopened and recovered. What the Asian giant is doing and what it will do is more important than anything to do with inflation, interest rates and business confidence.

To understand the future for this year, it is necessary to see how 2022 evolved. At least that is what analysts and their predictions for this new year suggest, according to the survey conducted by the investment fund manager Fidelity International every year for hundreds of experts.

Companies have been facing one of their most complicated fiscal years in recent years, when the global economy was damaged by various factors that destabilized it (and boy, did they do so).

Two months ago, a year began with higher prices and interest rates. We all know: companies are facing a difficult 2023.

However, there is hope and China, which is on the road to recovery, is the first data to watch. Optimism seems to have arrived. At least for investors, according to Fidelity surveys.

Is China waking up?

The annual ESG Survey conducted by Fidelity International probes the opinions of its global analysts, who compile analysis information from approximately 15,000 interactions with firms to detect trends in the business environment.

According to this analysis, more than 50 percent believe that their sectors are already in mild recession or worse. But looking at the bigger picture, almost all of these experts expect the business cycle to turn positive again by the end of this year.

Because of the exposure of the survey’s findings, Fiona O’Neill, head of Fidelity International’s data research department, points out that the results of her survey may be contradictory after a year in which the problems resulting from the Russia-Ukraine war coincided with the gradual end of ten years of rising stock markets and “cheap” money.

From a broader point of view, the US firm’s analyst thinks that the survey responses are in line with the logic of economics. In the analysis, she points out that as companies see themselves at the end of the economic cycle, they started thinking about the opportunities to come and investing money to position themselves against their competitors.

China’s release from Covid-19 is key

According to the survey, pricing pressures will increase in almost all sectors and regions in the first three months of 2023.

The Asian powerhouse, presuming that its bet on the new opening up will materialize, will revive and commodity, utilities and technology companies will again activate their investments, somewhat pressured by the environmental transition.

China is “freeing” its inhabitants from the zero Covid-19 measures, and its economy seems to be at another point in the cycle.

Almost all experts estimate rising incomes in this 2023 in China, the highest proportion of all countries.

To continue that upward trend, in Fidelity International’s latest monthly surveys, which compile short-term changes, the Asian country seems to be the only place where the U.S. firm’s experts have detected confidence among corporate executives these past two months.

In December, China began to ease policies against the spread of covid-19 and is ready for a new opening.

However, this optimism is checked by anxieties about possible new contagions of the coronavirus, as China moved from no tolerance of infections to accelerated openness.

O’Neill also said that companies have responded positively to the removal of these measures in China and stock markets have been rising rapidly for the past two months. Likewise, firms could be facing the worst short-term behavior due to the lack of employees and, on balance, they estimate that the road could be bumpy before the disease normalizes.

Trouble on the horizon

Despite some optimism last December, the problems ahead are visible in the wealth of information left in the survey. Fidelity National’s experts estimate a growth in debt defaults for this year.

The recent increase in shareholder remuneration will disappear, and merger and acquisition activity will slow down; in this case, 74 percent of the mutual fund manager’s experts say that the deals they do expect will be complementary and smaller.

Nearly three-quarters of those polled indicate that, for the time being, boards are focusing on cutting costs and bolstering revenues, rather than investing for growth or shareholder returns.

War continues to set the agenda for the global economy

Geopolitical issues, stoked by the war between Russia and Ukraine, are in full swing and the survey’s net negative reading on this topic doubled. Nearly 92 percent of Fidelity experts indicate that the companies they cover are concerned about environmental, social and corporate governance issues, much more so than before.

However, only 8 percent of analysts estimate that companies will decrease their negative impact on the environment by 2023.

For example, in ocean biodiversity, this number is 5 percent. Ned Salter, global head of Investment Analysis, pointed out that the survey shows that, when it comes to the ESG dimension, companies are listening and acting.

Biodiversity-related initiatives are still lacking direction in almost all companies, but it is an area of dialogue that they want to encourage with their investees in the coming months.

Finally, he said that “the recent UN Conference on Biodiversity in Montreal gave greater importance to biodiversity and its significance in achieving emissions neutrality, and this has given new impetus to our discussions with companies on this issue”.