EMEA sector outlooks navigate neutrality amidst high rates and easing inflation, says Fitch Ratings

New Delhi [India], January 9 : Fitch Ratings has released a comprehensive report outlining the sector outlooks for the Europe, Middle East, and Africa (EMEA) region in 2024.
The assessment predominantly leans towards a neutral stance, drawing attention to the intricate interplay of factors such as restrained economic growth, persistently high interest rates, and a backdrop of inflationary easing.
The prevailing scenario witnesses central bank policy rates reaching or hovering near their peak across most markets. However, the full ramifications of these elevated interest rates have yet to permeate the broader economy.
While inflationary pressures are showing signs of abating, Fitch anticipates that this easing might provide relief by alleviating some cost burdens on both companies and households.
Despite the positive aspects, the report underscores that lower-rated corporations and vulnerable household borrowers remain exposed to the potential repercussions of escalated refinancing costs and economic fragility.
This vulnerability emphasises the importance of a nuanced understanding of the evolving economic landscape.
In the real estate domain, a recalibration of some commercial property values is anticipated due to mounting pressure on affordability. Conversely, residential properties are expected to witness stability or modest price increases.
However, the overall outlook for the EMEA real estate, homebuilding, and building products sectors reveals a deterioration.
Higher interest rates, while generally favourable for bank earnings, are accompanied by a counteracting factor- higher funding costs.
Net interest margins have already peaked in certain European countries and are projected to do so in others throughout 2024.
Although asset quality is anticipated to witness a dip, Fitch suggests that the deterioration will likely be moderate, barring a substantial increase in unemployment beyond current expectations.
Interestingly, amidst the predominantly neutral outlook, there are glimmers of improvement in specific sectors. Notably, insurance sub-sectors within the EMEA region are showing signs of positive evolution.
While certain segments might contend with constraints like pressure on households' disposable income and market competition, the sector outlook for UK life, UK non-life, and Italian non-life insurance is on an upward trajectory.
The UK life sector, in particular, is poised to gain the most from higher fixed-income yields, while UK and Italian non-life insurers are expected to witness robust price rises.
However, the report sounds like a cautionary note for speculative-grade issuers, highlighting their increased vulnerability in the face of high interest rates and restrained growth.
Elevated debt refinancing costs, coupled with limited scale and diversification, pose challenges for these issuers.
Consequently, the outlook for EMEA leveraged finance is characterised by deterioration, emphasising the need for a nuanced approach and risk mitigation strategies in the dynamic economic landscape.