Executive Summary
More challenging macro environment. Global GDP growth is projected to decelerate to +2.5% in 2023, as low as in 2019. Advanced economies will likely dodge a full recession but will experience low growth in 2023 and 2024. Post-pandemic, consumers have shifted from buying goods to spending on services, which is dragging global trade and all related sectors. The US economy remains robust despite a challenging monetary environment, while the Eurozone grapples with minimal growth and stubborn inflation issues. As central banks remain determined to shake off inflation, interest rates should remain higher for longer, which will harm highly leveraged sectors and also eventually dampen capex. China's growth outlook has dimmed due to various challenges ranging from issues in the real estate sector to low consumer confidence, and emerging markets should also see lower growth.
Brace for Q3 as the outlook for corporates looks challenging.The Q2 earnings season revealed a decline in global revenues by -1.9% y/y, marking the first contraction across all regions since 2020. US revenues dropped by -0.3%, but S&P 500 companies saw a +0.5% y/y growth, bolstered by the financial sector. Meanwhile, after a strong Q1, European companies, are headed towards a -6.0% sales drop, mostly because of the energy sector (excluding energy, a +0.6% increase is projected). Global earnings decreased by -1.2% y/y, with significant contractions in marine transportation, paper, chemicals and metals & mining. The impending impact of rising interest rates could lead to ratings downgrades, escalating funding costs. Although companies maintain a higher interest-coverage capacity than pre-pandemic, the ratio is declining. The Q3 outlook appears bleak, especially for Europe, with the US showing slight improvement. European companies exhibit reduced optimism, with materials, technology and consumer discretionary sectors facing the most uncertainty.
Against this backdrop, we see a balanced risk landscape from the sector perspective. The bulk of our sector ratings are either ‘Medium’ risk or ‘Sensitive’ risk (a combined 85% of all ratings) across all regions. However, there is quite some risk dispersion between regions as Asia seems to be on the safer side while Latin America is on the risker side. In terms of sectors, pharmaceuticals or software & IT services are the ones with overall better ratings, while construction, textiles and metals are often deemed riskier.