Euro chem companies outperform markets, but challenges ahead – HSBC

10 December 2012 13:30  [Source: ICIS news]

Petrochemical plantLONDON (ICIS)--The European chemical sector has been one of the top performing sectors of the year, HSBC said on Monday, but warned that the rally could only continue at its current rate if the global economy grows faster than currently expected.

According to new data from the UK-headquartered bank, European chemical company stocks outperformed the general European market by 12%, US chemicals by 11% and Asian chemicals by 27% this year, despite the deteriorating macroeconomic environment seen in the second half of 2012.

Average chemical company stock prices rallied 25% during the year to date, and were up by 50% from the lows of the second half of 2011, HSBC added.

The bank attributed the market-beating performance of the industry to geographic and end-market diversity, a move by companies over the last 15 years to higher margin, lower capital intensity product lines, strong balance sheets and average share dividend yields 3.5% above the general market.

Despite the industry’s reputation as a cyclical sector, listed European chemical companies have outperformed the general market every year by an average of 9% for the last ten years, HSBC said.

However, the chemicals industry is dependent on end-market buyers, and HSBC estimates that global industrial production would have to increase by 12% year on year in 2013 to sustain the current levels of growth in the sector.

The bank forecast that industrial volumes would remain depressed in 2013, and that the European chemical industry is likely to be operating within a subdued global environment over the next five years, raising challenges of oversupply, and unit-cost inflation as capacity utilisation returns to normal levels.

HSBC identified Linde and Air Liquide as its picks for the best-performing stocks in the sector over the next 12 to 18 months, and Symrise and Fuchs Petrolub as its least-desirable stock picks over the same time period.

“We prefer the shares of companies with defensive business models that can offer investors a high degree of top-line growth and margin visibility or alternatively have internal growth opportunities arising from restructuring [or] cost efficiencies,” the company said in a note.

By: Tom Brown
+44 208 652 3214

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