Recently, S&P Global Ratings published 17 Industry Top Trends reports that assess key assumptions, risks, opportunities, and ratings trends for nonfinancial corporates globally.
The following is a text-only version of the overview of our reports. All 17 reports are available on our CapitalIQ Platform, an S&P Global Market Intelligence product.
The Rising Tide: Top-Line Expansion And Margin Improvement
A key theme apparent across most of reports is the positive impact of a relatively benign macro environment on growth forecasts and credit metrics. The synchronized global economic upswing and relatively steady global commodity prices have led to a sharp improvement in revenue and EBITDA growth in 2017. While the pace of growth is expected to moderate in 2018-2019, the aggregation of S&P Global Ratings analysts' forecasts for rated entities suggests sales growth of 5% for both those years and slightly higher EBITDA growth, implying a slight improvement in EBITDA margins. Revenue growth is expected for all industries, and EBITDA margin expansion for all bar one.
If borne out, this will mark a positive inflection point in nonfinancial corporate operating performance away from the stagnant top line and declining profit margins that characterized the past few years. Despite the improved cyclical position, S&P Global Ratings expects that central banks will continue with accommodative monetary policy for the next year at least, given an absence of inflationary pressures and a pace of growth that remains modest relative to previous cycles. While we expect the U.S. Federal Reserve to raise rates further in 2018, modest inflationary pressure and ongoing risks to growth suggest that the rate and frequency of changes will remain measured. As such, financing costs are likely to remain favorable, barring a substantial repricing of risk premia in financial markets.
Corporate Ratings Net Outlook Bias Improving Globally
Positive revenue and cash flow generation, cheap and generally accessible financing, and relatively stable credit metrics in aggregate are reflected in the continuing improvement seen in ratings trends for nonfinancial corporates globally. We have seen five consecutive quarters of improvement in the global net outlook bias, and the synchronous nature of the global economic improvement means that this pattern is reflected in the trends seen across all major regions. Even Latin America, the most pessimistic region in terms of its negative outlook bias, has improved for the past three quarters.
Disruption Is Creating An Impact On Relative Ratings Trends
While cyclical conditions may be favorable--and are expected to remain so in 2018--secular pressures are apparent across many industries, most notably those grappling with the risks and opportunities presented by increasingly ubiquitous digital technology. For example, e-commerce is disrupting almost all segments of global retail, presenting major challenges in terms of inventory and distribution, physical space requirements, online presence, and pricing. It is striking to see how little the global economic upswing has benefited the outlook bias for the retail sector relative to chemicals, another traditional cyclical sector. And that is despite the chemical sector facing its own challenges in terms of global overcapacity.
Similar pressures are highlighted by S&P Global Ratings analysts in the media sector (where media consumption and advertising patterns are transforming dramatically), consumer products (changing tastes and preferences, retailer price pressure), telecoms (changing usage patterns, regulation, investment needs), and autos (electrification and autonomous driving).
Also discussed are the shifting balances of power apparent between manufacturers and suppliers, as highlighted in our reports on aerospace and defense and autos. Auto OEMs have faced more direct financial pressure from rising investment needs and emissions-related regulatory requirements than auto suppliers, as reflected in relative net outlook bias trends. In response to this pressure, we expect to see more partnerships emerge in relation to development of new products. In aerospace, we also expect the OEM-supplier relationship to evolve as the former try to cut costs and increase control over aircraft development and production.
Other Risks Persist: Trade, Tax, And Oversupply
Disruption is not the only threat highlighted in our industry reports. Overcapacity--mainly supply-derived--remains a serious issue for a number of industries, notably chemicals, metals and mining, oil and gas, and shipping. Likewise, the increasing scope of environmental regulation globally is adding further impetus to R&D and investment spending needs that the auto sector faces, and remains a critical issue for utilities.
The change in emphasis in U.S. trade policy from pursuing multilateral treaties toward negotiating and renegotiating bilateral deals is creating uncertainty about the future of NAFTA, with possible ramifications for global supply chains, an issue highlighted in the auto, aerospace and defense, and transportation reports. The U.K.'s impending exit from the EU--Brexit--is creating similar uncertainties, both for trade, future regulatory environments, and supply chains. It is also creating uncertainty surrounding prospects for the commercial real estate outlook for London and similarly some potential uplift in some continental European cities.
And last, but far from least, the uncertainty around the final outcome of proposed changes to U.S. corporate taxation and health-care policy is an issue flagged by many sectors. As an illustration of this, the repatriation of overseas earnings poses a potential credit risk to U.S. technology companies should it lead to more generous returns to shareholders than we currently expect from their financial policies.
Rising Capex: Benefitting Some Sectors But Bearing Risks For Others
In the context of the disruptive pressures affecting many sectors, the resumption of positive corporate capex growth (see "Ready for takeoff: Global Corporate Capex Survey 2017," published July 31, 2017) can be seen as a mixed blessing. Both the capital goods and technology reports highlight the positive aspects of this upturn, with rising demand from core end-markets providing a favorable tailwind for revenues in those sectors. What is less positive is the confluence of capital expenditure in increasingly contested areas. Elements of the capex spending of retail (both food and non-food), technology companies, and autos--which rank among the top five sectors in terms of industry capex growth in 2017--are essentially in competition with one another, an example being Amazon's move into fresh foods, which has intensified the price competition already in play from discounters. In this sense, the upturn in capital spending can be seen as less a sign of confidence in the economic upswing and more a costly and potentially risky attempt to hold or gain market position. Positive returns on investment are unlikely to accrue to all of this spending.
M&A Activity Expected To Pick Up With Potential Financial Risks
This defensive stance is also apparent in one of the other core themes of the reports, namely our expectation that mergers and acquisitions activity is likely to pick up in 2018. For example, a key driver of potential M&A in the consumer products sector is the need to shift portfolios into faster-growing categories and regions in the face of income constraints in developed markets and retailers adjusting their product mix and pricing to compete with online offerings.
Similarly, the telecoms report suggests a possibility of more M&A in the U.S. than other regions given the need for scale to protect profitability and hedge against heightened competition and technology shifts. While there is nothing novel about M&A activity driven by these motives, overall it adds to a picture of a corporate sector still wrestling with a low-growth and highly competitive operating environment rather than a textbook cyclical upswing.
Should the expectation of an upturn in M&A be borne out, this will be a significant change from the relatively muted levels of activity seen in 2017. Quarterly values of closed M&A transactions globally have been broadly declining since mid-2015 and only a couple of industries--consumer staples and utilities--have seen total M&A for 2017 (up to Nov. 16) exceed the year before.
From a ratings perspective, the crucial question will be what any deals presage in terms of financial policy and any associated business risk. The aggregate indebtedness of S&P Global-rated nonfinancial corporates that are currently below investment grade has risen from 32% to 42% between 2004 and now, expressed in terms of total debt to total assets (unadjusted), suggested growing financial risk.
Yet, debt servicing costs remain exceptionally low--with little fundamental reason to move sharply higher in terms of S&P Global Ratings' base case for policy rates and inflation--and have been improved by regular refinancings. Median debt-to-EBITDA ratios for high-yield sectors show a mixed picture, split roughly half and half between sectors that have seen this measure of leverage rise, and those that have seen it fall over the past three years. The biggest increases have come in business and consumer services, engineering & construction, technology and oil & gas. The M&A pickup anticipated in many of the Industry Top Trend reports is seen as one of the key potential risks to ratings in the year ahead.