Why Fitch believes Apac corporates’ credit outlook will be neutral in 2024, despite headwinds

What are the assumptions behind Fitch’s view on APAC corporates?

Our view reflects ongoing issues impacted by persisting weakness in the Chinese property sector; challenging global macroeconomic conditions; higher interest rates; and sustained — albeit declining — inflation. 

Nonetheless, we expect this to be tempered by continued government support for infrastructure investment and improved consumer sentiment in large economies, and sustained growth in markets including India and Indonesia. We expect consumer spending and investment to normalise gradually, and moderating shareholder remuneration to support earnings, cash generation and leverage, and offset the modest deterioration in interest coverage.

We have a neutral outlook on most sectors in the region, except China property and Asian palm oil. We expect deteriorating outlooks for both of these sectors — in China, we expect a further contraction in property investment and national sales in 2024, and for palm oil, a sharp increase in supply leading to major price weakness and lower EBITDA.

We expect cyclical sectors to be more vulnerable to adverse macroeconomic conditions and monetary policies. In some verticals, the positive impact of the post-Covid recovery is expected to trail off, offsetting the impact of destocking and easing supply chains in other sectors.

Consolidation in areas such as steel, cement, and engineering and construction in China, and telecoms in many Apac markets, are supportive of the performance of larger players. In technology, the semi-conductor segment is likely to recover from the recent trough, while easing regulatory pressure in China is beneficial to the bigger companies. In natural resources sectors including oil and gas, and coal, commodity prices which are lower — but still robust — support cash generation, covering capex related to growth and energy transition.

We believe that the prolonged downturn in the Chinese property sector will continue to have a sprawling impact even beyond real estate. Lower use of metals, building materials, and products is burdening these sectors. Consumer spending is being constrained by soft consumer confidence and could jeopardise the recovery of sectors including lodging, gaming, transportation, leisure, and automotive. The likely uptick in investment could falter and weigh on manufacturing and technology companies’ revenue, which depend on other sectors’ capex.

The efficacy of China’s property sector specific support measures has not been very effective or has resulted in only short-term positive impacts. We think stimulating the economy and building consumer confidence is key to improving the outlook for the property sector, and consumption more generally.

We also expect geopolitics to remain a central issue. Sino-US tensions have eased recently, but we anticipate relations to remain challenging. As a result, companies will continue to pursue further supply-chain diversification to limit exposure to geopolitical risks. Several Asian corporates may reorganise their supply chains and benefit from shifting investment inflows, particularly since their economies reopened — especially for Singapore, Korea, Thailand, and Vietnam. This should affect the industrial and technology sectors, in particular.

More positively, input costs are declining. The fading effect of the energy shock, together with lower fuel prices, will ease the pressure on input costs for corporates, particularly in energy intensive sectors such as steel and building materials. Lower commodity prices will also bolster earnings.

Furthermore, we assume an upturn in the global tech cycle in 2024. We also expect that headwinds from slackened external demand will recede gradually. The tech cycle is generally short; and technological developments, such as 5G, are likely to spur renewed investments. This will support a gradual strengthening of export momentum in Asia, which comes from a low base considering the weak external demand in 2023.

In this context, how do you see key credit metrics developing?

We anticipate the aggregate EBITDA margin of Apac corporates to recover in 2024, to around 14%, following three years of deterioration. The natural resources and oil and gas sectors should be outliers and record narrowing margins, as several commodity prices come down from record levels. We also expect aggregate free cash flow (FCF) margins to strengthen, in line with wider EBITDA margins. The positive effect from higher earnings should be compounded by moderating capital expenditures and lower dividend payment. We forecast most sectors will lower investment, with the notable exceptions of oil and gas, and utilities, which must cope with the energy transition and catch up further on the post-pandemic investment restrictions.

We forecast net leverage to be broadly stable in 2024, around 2.5x across sectors. Leverage should decrease the most in the chemicals, gaming, lodging, and leisure sectors due to significantly stronger FCF generation used to pay down debt, combined with better EBITDA. Conversely, we anticipate leverage to increase — slightly — in the technology, natural resources, and homebuilding sectors.