S&P Global – Capital Goods Credit Outlook, 2024

The article discusses the current state of the industrial economy, specifically focusing on the impact of destocking and the outlook for the capital goods sector. Inventory liquidation has been widespread, which can sometimes indicate an economic downturn. However, inventories are returning to normal levels after a historic spike in working capital caused by disrupted supply chains. Despite the drop in costs and easing of supply chains, bargains are scarce in the market. Producer prices have only moderately decreased in 2023, despite the sharp decline in commodity and energy costs. The successful execution of investments in new products, research and development, and acquisitions will be crucial for maintaining credit quality and revenue growth. The key assumptions for 2024 include slowing economic growth, as indicated by S&P Global economic forecasts and Purchasing Managers Indexes. Investment growth is expected to remain flat for a couple of years following a two-year boom. Lower input costs and softer demand should keep prices contained, but the availability and cost of skilled labor may limit output growth in certain sectors. There are several key risks to the baseline outlook. If interest rates catch up with investment ambitions, lower orders in 2024 could lead to a longer and deeper downturn in the industry. Additionally, discounts or incentives could erode margins if demand further weakens. Refinancing pressure is also expected to rise in 2024 and 2025, particularly for low-rated issuers from leveraged buyouts in the U.S. and Europe. Rising interest rates and uncertain valuations pose challenges for these issuers, while higher interest rates will eat into the free cash flow of investment-grade issuers.