NEW YORK (ICIS)--The global economic recovery along with a return in chemicals demand from the coronavirus crisis will take longer than after the financial crisis of 2008-2009, leading to a U-shaped recovery, a chemicals equity analyst said on Tuesday.
“We’re only going to hit firm demand for a lot of these value chains by mid-2021 and in absolute terms in my view, we’re only going to hit the same volume of chemicals production globally as we had in early Q1 2020, in Q1 or Q2 of 2022,” said Sebastian Bray, head of chemicals research at Berenberg. He made his comments in a webinar, part of a series being hosted by ICIS.
“So the impression I have is a U-shaped recovery and investors for most of the sub-sectors of chemicals are probably going to adjust the valuation multiples they apply to the sector,” he added.
Recovery will be slow as once the lockdowns are lifted, consumers are not likely to rush out and buy cars, high value discretionary items or even expensive cosmetics or food products, noted the analyst.
The analyst largely rules out another major leg down in chemicals so long as the Europe and US lockdowns come to an end in mid-to-late May.
“For every additional month of lockdown that we have, the average US and European specialty chemicals company is going to lose something in the region relative to 2019 numbers, of 5-6% of its operating profit and probably in excess of 10% of EPS (earnings per share),” said Bray.
Investors have recently become somewhat less fearful with an apparent end in sight to the lockdowns, but also have reset their expectations on the rate of recovery, the analyst noted.
For the European economic outlook, there is an increasing risk of “Japanification” - zero to negative growth along with potential deflation.
“If we do have Japanification in Europe, where it is difficult to get inflation moving through the chain, particularly for the mid-to-downstream chemistries where we have less formula pricing and there’s more negotiation on a three to six month basis, then we might see a longer term lower growth rate of industrial production,” said Bray.
The coronavirus crisis is largely pushing most industrial markets into a lower growth trajectory, with the exception of agricultural chemicals and packaging, he said.
For European chemical equities, the analyst compares the level of valuations based on cash flows today to the early 2009 period coming out of the financial crisis.
“What I think has changed this time, however, and makes investors more cautious about returning to this market than in 2009 and 2010, is the speed of swing-back and the increasing trend towards Japanification, particularly in Europe,” said Bray.
Following the financial crisis of 2008-2009, China ramped up stimulus in a big way, especially in construction, which benefited many chemicals chains, he noted.
While China is taking major monetary and fiscal stimulus measures, they pale in comparison to the debt-fuelled spending spree following the last crisis.
Plus, while central banks around the world are no doubt throwing the kitchen sink at the coronavirus crisis with unprecedented monetary stimulus, the magnitude of interest rate cuts was much greater during the financial crisis. This time around, rates were already low or even negative, having less room to fall.
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Focus article by Joseph Chang