24 February 2016

The magnitude of market moves over the first couple months of 2016 have prompted fears of a global recession – but do these drastic moves actually reflect the underlying health of the global economy?

One way to find out is to get a sense of how companies – particularly those companies most sensitive to changes in the economy – are feeling about the outlook for their businesses.

The game’s not over

To that end, we have been pouring through transcripts of conference calls from the industrial and construction companies that have reported so far this quarter to better understand the views of their management teams. We’ve found that while the market may be saying ‘game over’ (see individual share price moves and valuation changes related to analyst earnings revisions) the companies we’ve analysed are simply not seeing a recession.

Seeing a different picture in the US

This disconnect between what the market is doing and what companies believe is particularly evident in the construction sector: companies expect US construction to continue to grow – the market says otherwise. The reality is that, aside from those names who are dependent on the fortunes of the oil and gas and mining industries, all of the results from the construction companies we analysed either beat or were in line with expectations; a quite different picture to the one the market is painting.

Temperature check in Europe

One message that has come through strongly in our analysis of call transcripts is this: Europe is trading much better than rest of world. We looked at longer-term inventory data for European capital goods companies that have reported so far this year (mainly restricted to Scandinavian companies) for corroborating evidence – companies sitting on mountains of unsold product would be a key indicator of structural demand problems in the economy. However, while it’s clear that these companies are in destocking mode, current inventory levels are broadly in-line with post-2008 median levels, giving some hope that the destock is nearing its conclusion. There is no evidence of an inventory overhang in Europe, possibly because companies have already been through much of the destocking pain already.

Companies sometimes miss predicting problems and can be biased towards optimism in their reporting – we would never use this type of analysis in isolation – but even so, markets appear somewhat oversold. The sell-off has created some idiosyncratic value opportunities, even in the industrials sector, but investors may need to be very selective to realise these.

Source: BlackRock analysis of various FY and Q4 2015 company reports and associated conference call transcripts, February 2016.

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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 22/02/2016 and may change as subsequent conditions vary.

‘We’ve found that while the market may be saying ‘game over’, the companies we’ve analysed are simply not seeing a recession.’