Fidelity: growing optimism in Europe

European companies are back from years of cost control and consolidation. With the winds of global growth in their sails, they are making the most of ultra-cheap funding costs, growing profitability, and sound balance sheets to invest in capital and technology, and to reward shareholders.

According to our Europe analysts, company management teams are noticeably more confident about the outlook for their businesses. Just over half of analysts – double last year’s rate – say management confidence to invest in the business is up on 2017.

More than four in ten expect higher capital spending. The emphasis remains, like elsewhere, on maintenance spending but more companies are beginning to spend on growth.

Well over half of all Europe analysts expect returns on capital to increase, led by demand growth and cost savings – the rosiest view anywhere in the world. Still, it is clear that companies can ill afford to ease up on the cost discipline that carried them through two recessions in a decade. For example, cost cutting is a significantly more important contributor to expected growth in returns than in the US, and fewer analysts say pricing power will add to increased returns.

Higher returns on capital and healthy balance sheets will allow many to raise dividends further. Six out of ten Europe analysts expect an increase in payouts, a higher share than anywhere else but the US.

Most European analysts also expect a focus on M&A activity over the next 1-2 years. Deals are most likely to involve bolt-on acquisitions, rather than the large strategic deals which feature more prominently in US analysts’ expectations

Overall, Europe seems to be in good shape. Deflationary fears have subsided as the peripheral economies have picked up. Austerity is not as severe as it was, and wages are expected to rise by almost three quarters of our analysts watching the region, giving consumers a boost. (The exception is the UK, where real wage growth has been negative since early 2017, partly due to the inflationary impact of sterling’s slide after the Brexit vote.)

There are some actual and potential headwinds our analysts are keeping a close eye on. Even more than last year, Europe analysts warn Brexit is already weighing on strategic UK investment decisions. The vast majority also note that corporate profits would be vulnerable to political uncertainty or instability in Europe.