The very mature credit cycle that began in 2010 shows no signs of abating amid the unprecedented, and ongoing, combination of low oil prices, shallow inflation and low interest rates. These factors contributed to a reduction in corporate defaults this year.

However, while the likelihood of a recession amid this environment is low, the desire to boost shareholder value has spurred leverage-increasing activities such as stock buybacks and the payment of high M&A multiples, thus weakening the credit profile of many corporates. In addition, it is Scope’s view that the possibility of external shocks from political and military conflicts has grown.

Scope’s primary concern relates to share buybacks and M&A multiples, especially when compared with pre-2008 levels. US companies are engaging in the most intense activity, with buybacks seen reaching pre-crisis levels this year, whereas in Europe, the total is still less than half that of before 2008.

Combined with dividend allocations, many investment grade companies are distributing all, or even more, than their free cash flow totals, while investment in research and development continues to decline. In addition, acquisitions in both the US and Europe have increased, with multiples now at pre-crisis levels, led once again by more aggressive US companies.

It is Scope’s view that, while current cash flows are strong enough to support this strategy, such activities could contribute to negative rating actions and defaults if economies fall into recession.

Below is a summary of Scope’s 2018 outlook by industry:

Healthcare: Stable outlook. Growth driven by innovation, with conservative policies of European pharma producers protecting against potential downgrades. However, large M&A action can’t be excluded, which would likely lead to downgrades.

Chemicals: Stable outlook. Late stage of cycle, with credit metrics seen deteriorating slightly. Profits of integrated chemical companies could fall, while industry changes and low interest rates make higher debt levels more likely.

Real estate: Stable outlook. Supported by demand among tenants and investors. ECB policy has enhanced financial risk profiles, but sensitivity to political and economic conditions, as well as interest rates, growing. Companies focusing on UK facing more volatile credit profile.

Construction: Stable outlook. Demand forecast to increase. Low interest rates and easy access to capital markets improving debt protection while maintaining leverage. However, growth and profit constrained by domestic supply-chain pressures.

Airlines: Negative outlook. Slowdown forecast for 2018. Key credit metrics likely to deteriorate amid overcapacity and lower passenger growth. More industry consolidation possible.

Container shipping: Positive outlook. Supply and demand fundamentals seen improving, leading to increased profitability. Oversupply of new vessels will continue to moderate. Still, volatility and leverage expected to remain high. Further consolidation likely.

Postal services: Stable outlook. Surging parcel volumes to continue offsetting shrinking letter mail. Average operating leverage seen staying low and all major European players maintaining robust financial risk profiles.

Automotive: Stable outlook. Limited revenue and earnings support from light-vehicle sales as growth slows in high-volume Chinese, US and European markets, while Middle East, South America and South Asia fail to compensate.

Utilities: Positive outlook. Industry supported by rebounding commodity prices and portfolio restructuring effects. Political headwinds seen easing. Financial risk profiles expected to stabilise further due to more defensive business mix of majors and improved pricing.

Retail: Stable outlook. Sector will continue to grow in 2018, and while capital expenditure required for expanding retail channels will degrade credit quality slightly, it will also lead to more robust business risk profiles.

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