14 January 2013 14:01 [Source: ICIS news]
LONDON (ICIS)--The European chemical sector’s current outperformance of general markets may be threatened by the sluggishness of wider macroeconomic growth, HSBC said on Monday.
The sector out-performed the general European market by 12% in 2012, also beating out the US and Asian chemicals sectors, despite the region’s economic woes during the year. However, the global macroeconomic environment will need to rally this year to maintain the current rate of growth, according to the bank.
General industrial production would need to grow by over 10% this year to justify the current level the sector is trading at, HSBC said, meaning that a stronger-than-expected eurozone recovery may be necessary to sustain the expansion for the chemicals industry.
“With valuations at historical highs and in the absence of improving macro we see little room for further strong performance,” HSBC said.
However, HSBC had estimated in December 2012 that industrial production would need to expand by 12% to justify the sector’s current performance, indicating that industrial production is currently expanding.
The European chemicals sector’s 11% outperformance of the US chemicals sector last year is in spite of the US enjoying a stronger recovery than the eurozone, as well as cheaper feedstock prices as a result of the shale gas boom.
HSBC attributed this disparity to wider diversification by European companies – 50% of European chemical company sales come from outside of Europe – as well as strong balance sheets, and the shift to higher-margin, less capital intensive product lines over the last 15 years.
“With the eurozone financial crisis abating in H2 2012, we believe that non-European investors started to increase their weighting to the region,” the company said.
The risk of a eurozone break-up has been reduced by the European Central Bank’s bond-buying programme, HSBC added.
The bank’s favoured stocks in the sector are Germany-based industrial gases producer Linde and Switzerland-based agrichemical firm Syngenta, based on a preference for companies with defensive business models and "the potential for a high degree of top-line growth and margin visibility.”HSBC’s least-preferred stocks for the next 12 to 18 months are Germany-based lubricants manufacturer Fuchs Petrolub and Belgium-based materials technology company Umicore.
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