Slowing China, Lower Commodities Dampening Demand

Globally, lower commodities prices have impacted emerging markets in different ways. Energy consumption continues to be a major factor driving growth across the emerging economies, but the downward trend to date in 2016 has not helped. If anything, a number of countries are seeing a strain as China, a major buyer of commodities has pulled back as it faces its own domestic issues.

Sales trends, according to agency Fitch Ratings, for diversified industrials and capital goods manufacturers were “weak” in 2015. A majority of companies globally reported a decline in sales. Lower sales, Fitch says, really reflect a combination of “low or negative organic growth and the adverse effect of the strong dollar.” Weakness will continue through 2016 and most likely into 2017, particularly in important end markets such as mining, oil and gas and agriculture, and  Fitch is maintaining its negative outlook for the diversified industrial and capital goods sector.

That said, a number of diversified industrial companies continue to repurchase their shares, but at a slower rate in a number of cases, while also pursuing acquisitions. Together with the effect of lower EBITDA, this may cause financial leverage to remain “elevated” for some issuers.

Companies that have undertaken large share repurchases include CAT, Cummins Inc., Eaton Corporation plc, Parker-Hannifin Corp. and United Technologies Corporation (UTC). Fitch downgraded UTC by one notch to ‘A-‘ in 2015 due to the company’s increased focus on shareholder returns.