MEDIUM RISK for entreprises
In 2018, the Working Capital Requirement of large companies deteriorated back to its highest level since 2012, with big rises in emerging markets such as Brazil, South Africa and Russia.
The global economy seems to have gone back to the 2015-16 limbo after two years of strong growth.
Eurozone companies have witnessed an unusual accumulation of stocks since mid-2018. The high level of inventories calls for a downside adjustment in production, and we expect destocking to push down growth in 2019.
What to Watch?
Supported by high oil prices and global demand strength, a deleveraged energy industry is returning to growth while keeping capital discipline. Global capex of growth of +15% y/y 2018 is underpinned by +25% average sector cash flow growth, according to Bloomberg consensus. Oil prices will be governed by the interplay of demand strength and inventory reduction (bullish) vs US production growth and prospects for revision of the November 2017 OPEC/non-OPEC supply cut agreement (bearish).
The power sector may also be returning to growth after several years of commodity price weakness, declining earnings and resulting aggressive deleveraging and cost cutting. The European sector alone could deploy funds for growth capex or M&A in the order of EUR 75bn according to our estimate. Power prices provide earnings upside on the basis of 2019 futures standing 25% above current hedge levels. The phase out of coal is one of the major risks for thermal generation. Capex in the coal sector has declined by -50% between 2012 and 2016, a trend that is likely to continue as more policies get refined, particularly in China and Germany but also on emissions markets. Supply and low carbon technologies have become the strategic growth sectors of choice. In these sectors, technology disruption and structural change will continue as a key theme. Clean energy could see new growth going forward as the maturing technologies (wind, solar) come off subsidies.
E&P: Profitability continues on the path of recovery in the silage of high oil prices
Refining: Falling refining margins along with rising oil prices could put pressure on margins
Networks and infrastructure: Pipelines to benefit from volume growth. New opportunities for electricity and gas infrastructure, turning into the backbone of energy transitions. But intense regulatory scrutiny, as returns are reconsidered
Clean energy growth will benefit from high oil
These assessments are, as always, subject to the disclaimer provided below.
This material is published by Euler Hermes SA, a Company of Allianz, for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by Euler Hermes and Euler Hermes makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the Euler Hermes Economics Department, as of this date and are subject to change without notice. Euler Hermes SA is authorised and regulated by the Financial Markets Authority of France.
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