Sector Atlas 2024; ECB in for rate cut round two, plus the latest on Chinese equities and Commodity prices

Well, we’re back: tanned, rested, and ready to serve you again valuable insights on critical developments and in-depth analysis on a wide range of economic topics. We’re back after our summer break with our Sector Atlas – a compendium with the key opportunities and challenges as well as strengths and weaknesses along with our risk ratings for a total of 17 industry sectors we monitor and analyze on a regular basis. Check out which sectors we view as outpriced, and whom we see as the outcasts and outliers. In our What to Watch publication, we discuss our expectations for the next ECB meeting that should deliver a second rate cut in the Eurozone; we dig into Chinese corporate earnings season and investigate commodity prices and the risk they pose for inflation going forward. And we recently updated our risk assessment for a batch of countries in the Middle East.

It’s good to be back!

Sector Atlas 2024: the outpriced, the outcasts and the outliers

As in 2023, we checked the pulse of global sectors from a non-payment risk perspective; sectors covered span from agrifood and automotive to Telecom and Transportation - our key findings:

• A heavy political agenda is to test global economic resilience once more. Global growth bottomed out in H1, but the global manufacturing sector is still in excess supply, and demand remains sluggish, especially in the Eurozone. We expect global GDP growth at +2.8% in 2024 and 2025, with growth slowing to +1.7% in the US and reaching +1.4% in 2025 in the Eurozone. China will continue to manage its growth slowdown (+4.3% in 2025).
• Corporate earnings towards a recovery? The latest earnings season has delivered mixed results: global revenues grew by +3.5% y/y but revenues stalled for European corporates (-0.7% y/y) while US and Asia-Pacific firms both reported growth at +4.5% y/y. Nevertheless, 58% of global corporates, including 59% of European ones, beat expectations. From a profitability perspective, global earnings grew by +14.7% y/y. US firms reported +10% y/y in earnings growth with 69% beating expectations while 53% of European ones also beat expectations despite reporting -2.5% y/y growth. A few sectors mostly related to technology are outperforming, while others struggle. In the US, S&P 500 firms showed moderate growth, but concerns about future earnings are still lingering. In Europe, cyclical sectors and the luxury industry – a long-time outperformer – are slowing. Banks are holding up well despite heightened economic uncertainties. Looking forward, economic resilience and easing monetary policy could support further growth and the earnings recovery.
• Looking closer into sectors, we identify 3 main clusters: (i) sectors facing weaker demand and lower pricing power, (ii) sectors facing supply chain and geopolitical challenges and (iii) industries with stable or improving outlook. In the first cluster, we have sectors like pulp & paper, chemicals, agrifood, retail, textiles and household equipment where limited growth and pressured margins dominate the outlook. Supply chain and geopolitical issues are still significantly weighing on industries such as transportation, energy, and transport equipment, where demand remains resilient but operational and geopolitical hurdles persist. Stable or improving sectors, including pharmaceuticals, automotive, computers and IT services, benefit from technological advances such as AI which is boosting corporate IT spend and steady demand through structural trends (e.g. demographics, green transition etc.). However, some of these sectors face specific challenges like regulatory risks.
• Given this context, most of our sector ratings fall into the ‘Medium’ or ‘Sensitive’ risk categories. 87% of all ratings across regions fall into these two ratings. Like last year, there is notable variation in risk levels between regions, with Asia generally being safer and Latin America being more at risk. In terms of industries, pharmaceuticals and software & IT services tend to have stronger ratings, while construction, textiles, and metals are considered riskier. Compared to the pre-Covid period, most sectors are still below 2019 despite the recovery in ratings. Changes in ratings over the last four quarters are pointing to several sectors standing out. Household equipment, chemicals, construction and textiles are standing out with an overall negative balance. On the contrary, the recovery in ratings proved to be substantial in the auto sector, in transportation and in machinery equipment. But this is not a surprise since those sectors were the ones most downgraded after the onset of the pandemic.

The comprehensive analysis for you here.

What to Watch this week

This week, we discuss our expectations for the next ECB meeting that should deliver a second rate cut in the Eurozone; we dig into Chinese corporate earnings season and lastly, we investigate commodity prices and the risk they pose for inflation going forward.

• ECB: rate cut round two. At its next meeting on 12 September, we expect the ECB to lower the deposit rate for the second time this year to 3.50% after a pause in July. With inflation dropping to 2.2% y/y in August, loosening the restrictive stance is justified. Going forward, the ECB will follow a gradual cutting cycle, reaching a terminal rate of 2.5% in mid-2025. However, with record low unemployment, strong wage growth and sticky core inflation, the ECB is not in a rush and is likely to emphasize a careful data-dependent approach.?
• Chinese equities: reaching for rock bottom. China's earnings growth and equity markets have struggled in 2023 and 2024, hindered by weak consumer demand, the still-present real estate crisis and geopolitical tensions. Despite government efforts to stabilize the economy, over 50% of companies missed earnings and revenue expectations in Q2, particularly in key sectors such as consumer staples and technology. Capital outflows and reduced transparency on foreign investments have further dampened market sentiment. However, economic stabilization paired with the accelerating earnings rebound is likely to keep Chinese equity returns in the green for both 2024 and 2025, supported by continued policy measures, rate cuts and fiscal spending. With further economic stabilization expected in 2026, Chinese equities could see stronger double-digit returns in the future, presenting long-term opportunities despite the short-term risks.?
• Commodity prices: cooling down but not for power, especially in Europe. Despite alarming headlines across the globe, most commodity prices are on the mend either because supply is strong (grains) or because the demand outlook is weaker (oil, metals). Some outliers remain, such as coffee or cocoa, but they do not pose a significant inflationary risk. Going forward, we expect prices to continue to consolidate for most commodities. We expect oil to continue to trade in the 75-85 USD/bbl range. Natural gas prices in Europe, and consequently power prices, remain an issue for inflation. Concerns over supply and weather conditions ahead of winter are making markets nervous, despite plenty gas in storage (above 90% of capacity). Nevertheless, we expect retail power prices to remain broadly stable. Indeed, we believe either governments (which are under fiscal pressure) may take advantage of lower wholesale prices to recoup some of revenues lost over 2022-2023 by increasing taxes and levies to pre-2022 levels or they may keep them low at current levels in case of a market accident, all of which would be rather neutral for consumer prices.??

The complete set of stories for you here.

Revised country risk reports

• Kuwait: Rated B2 (medium risk for enterprises), and a climate of economic stagnation amid falling oil prices.
• Saudi Arabia: Rated B1 (low risk for enterprises), with stagnated oil prices and production weighing on the Kingdom’s economy this year.
• South Africa: Rated B3 (sensitive risk for enterprises), as the country needs to navigate structural challenges, political reforms, and global trade opportunities.