Fitch Ratings says the solar power sector is likely to face tough trading conditions for the next two or three years. Cuts to incentives for renewable power in a number of countries will weigh on the sector until better technology and carbon-emission charges on other forms of electricity generation make costs more competitive.
Some countries could also announce additional cuts as the sovereign debt crisis puts pressure on public finances and as the affordability of electricity prices becomes a key policy item under strained economic conditions.
The impact of a supply glut in photovoltaic panels from Chinese manufacturers combined with potentially weakening demand as tariffs fall will weigh particularly heavily on the European solar panel manufacturing sector in the short term.
However, we believe the third phase of Europe’s emissions trading programme, which begins in 2013, will be a key development for solar power to become cost-effective.
Over the next three or four years, we believe technology advances in the sector will also help increase efficiency and reduce the price premium compared to other energy sources. The difference could be further eroded if a strengthening global economy led to sustained high oil and gas prices, which would feed through to higher electricity prices.
Full Fitch statement.
Provisional 2010 data show that among 30 OECD countries, only Chile and Mexico have a lower rate of taxes as a percentage of GDP than does the US. What’s more, the US ratio has fallen by over 3 percentage points since 2007 to 24.8% to well below the OECD average of 33.9%.
Final percentages for 2009 are shown below.
More details here.
Credit Suisse remains positive on the longer term outlook for US equities but tactically negative over the next few months. A Nov 24 report from the bank’s investment committee sees increasing downside risk in fixed income, but expects low interest rates will continue to support commercial real estate.
With the US economy continuing to grow despite the Eurozone’s problems, and equity valuations reasonable, our fundamental stock market outlook remains positive. This balances the technical downgrade that reflects the recent weak price action, to leave us still with a tactically neutral view on equities.
With ongoing intense funding pressure for Eurozone banks likely to gradually limit credit – especially to southern Europe – and intensify the slowdown, the crisis seems to be entering a new phase, with Italy and Greece making genuine steps to tighten fiscal policy, while Chancellor Merkel puts more emphasis on plans for fiscal union.
One result seems to be that German government bonds are coming under selling pressure. In short, policy moves continue in the right direction, but uncertainty and volatility remain elevated and likely to stay high for some time.
Downside risk in credit markets is increasing. Financials and High Yield are particularly at risk. Focus on top quality investment grade corporates.
Commercial real estate should continue to benefit from low interest rates, but the weakening economic outlook is likely to slow down rental growth.
For details see the full 10-page Credit Suisse Investment Committee Report US
Fitch Ratings affirmed the United States (U.S.) Long-term foreign and local currency Issuer Default Ratings (IDRs) and Fitch-rated U.S. Treasury security ratings at ‘AAA’. Fitch has also simultaneously affirmed the U.S. Country Ceiling at ‘AAA’ and the Short-term foreign currency rating at ‘F1+’. The rating Outlook on the Long-term rating is revised to Negative from Stable.
The affirmation of the U.S. ‘AAA’ sovereign rating reflects still strong economic and credit fundamentals. U.S. sovereign liabilities, both the dollar and Treasury securities, remain the global benchmark and accordingly the U.S. credit profile benefits from unparalleled financing flexibility and enhanced debt tolerance, even relative to other large ‘AAA’-rated sovereigns. The U.S. dollar’s status as the pre-eminent global reserve currency and depth of the U.S. Treasury market render financing risks minimal and underpin a low cost of fiscal funding.
Fitch’s revised fiscal projections envisage federal debt held by the public exceeding 90% of national income (GDP) and debt interest consuming more than 20% of tax revenues by the end of the decade, and including the debt of state and local governments – gross general government debt will reach 110% of GDP over the same period. In Fitch’s opinion, such a level of government indebtedness would no longer be consistent with the U.S. retaining its ‘AAA’ status despite its underlying strengths. Such high levels of indebtedness would limit the scope for counter-cyclical fiscal policies and the U.S. government’s ability to respond to future economic and financial crises.
The Negative Outlook reflects Fitch’s declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. ‘AAA’ sovereign rating will be forthcoming.
The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon. Fitch will shortly publish its revised economic and fiscal projections for the U.S. and will conduct a further review of its sovereign ratings in 2012. However, in the absence of material adverse shocks, Fitch does not expect to resolve the Negative Outlook until late 2013, taking into account any deficit-reduction strategy that emerges after Congressional and Presidential elections.
Full Fitch statement.
Fitch also took the following related ratings actions:
Fitch Revises Fannie Mae and Freddie Mac Outlook to Negative; Affirms Ratings at ‘AAA’
Fitch Revises the Rating Outlook on the Federal Home Loan Banks to Negative
Fitch Revises Rating Outlook on the Farm Credit System to Negative
The three major credit rating agencies have made initial comments on the failure of the Super Committee to reach agreement on a deficit cutting plan, and it is Fitch that seems closest to taking action as a result.
In Fitch’s August 16 statement, when it affirmed the US ‘AAA’ sovereign ratings with a Stable Outlook, the agency commented that it would update its US economic and fiscal projections in light of the work of the ‘Super Committee’.
Fitch also commented that failure by the Super Committee to reach agreement would likely result in a negative rating action — most likely a revision of the rating Outlook to Negative, which would indicate a greater than 50% chance of a downgrade over a two-year horizon. Less likely would be a one-notch downgrade.
Fitch said the announcement that the Super Committee was unable to reach agreement on at least USD1.2 trillion of deficit-reduction measures underscores the challenge of securing the political consensus on how to reduce the federal budget deficit and place US public finances on a sustainable path over the medium-term. Fitch now expects to conclude its review of the US sovereign rating by the end of November
Standard&Poor’s said that the ratings and outlook on the United States of America (AA+/Negative/A-1+) are not affected by the announcement of the Congressional Joint Select Committee on Deficit Reduction indicating that it could not agree on fiscal consolidation measures to put to a congressional vote. The Fiscal Committee’s inability to agree on fiscal measures that would stabilize U.S. government debt as a share of GDP is consistent with our Aug. 5 decision to lower our rating to ‘AA+’. However, we expect the caps on discretionary spending as laid out in the Budget Control Act of 2011 to remain in force.
Moody’s said the failure will be “informative but not decisive” in its analysis of its U.S. top credit rating.
Failure by the so-called super committee to reach an agreement “would not by itself lead to a rating change for the U.S. government,” a spokesman for Moody’s said in a statement. Moody’s has a negative outlook on its U.S. Aaa rating.
United States of America Ratings Unaffected By Fiscal Committee Impasse
Amid a reallocation of market share across the U.S. retail industry in 2012, Fitch Ratings expects the stronger, growth-oriented retailers will continue to take market share, while others struggle to maintain relevance in a mature but dynamic sector.
Positive or negative traction on this front will be central to ratings movement. Fitch notes market share defensibility is a crucial consideration when assessing retail credit profiles. At one end of the spectrum are Costco Wholesale Corporation, Macy’s, Inc., and AutoZone, Inc., whose strong positive comparable store sales exceed their respective industry growth rates, indicating strong market share gains. At the other end are RadioShack Corp.), Best Buy, Co., Inc., Sears Holdings Corp., and SUPERVALU Inc. , whose negative comparable store sales suggest continued slippage of market share.
Another key theme for 2012 is the changing business models for U.S. retailers, especially the specialty retail segment, which faces enhanced competition, the development of newer channels and the need to adapt accordingly.
Fitch expects overall credit stability for U.S. retailers in 2012, reflecting mid-single-digit sales growth amid the backdrop of changing business models and the ability of companies to defend market share. Five retailers currently have Negative Outlooks and one a Positive Outlook, suggesting modest downward pressure on ratings over the next 12 months.
Same-store sales are expected to increase 2%-3% with modest expansion in square footage.
Liquidity will remain generally strong and 2012 debt maturities are moderate ($12 billion in debt coming due across the 45 companies rated or monitored by Fitch).
For the 2012 holiday season, Fitch projects 2%-3% growth over 2011, following a strong back-to-school season. These expectations recognize the weak recovery in consumer spending and an ongoing focus on value.
For details, see the full U.S. Retail 2012 Outlook: Muddling Through in Maturity is available at ‘www.fitchratings.com.’ This outlook report covers all segments within Fitch’s retail industry ratings portfolio: discounters, food and drug retailers; department stores; and specialty and apparel retailers.
Fitch Ratings’ latest quarterly European Fixed Income Investor Survey shows that expectations of growth-oriented company investment dropped to their most negative since Q110.
“Capex and mergers and acquisitions are now considered much less likely to occur than six months ago, with fewer than half of respondents anticipating a moderate- to significant focus of corporate cash usage in these areas,” said Monica Insoll, Managing Director in Fitch’s Credit Market Research group.
These readings represent roughly a halving of those at the Q211 peak, confirming the weakening trend in macro-economic sentiment indicated by other parameters surveyed.
Although the Q411 survey was conducted during October – a relatively benign period in the financial markets until the escalation of the Greek crisis at the end of the month – investors signalled dramatically lower confidence in the economic outlook. A survey-high of 70% of participants said the risk of a double-dip recession is high; up from 40% and 21% in the prior two quarters, respectively.
Survey participants also expressed concern over the slowdown of emerging market growth, which has become a dynamo for much of world economic activity. Investors were more negative about the outlook for fundamental credit conditions in the EM sovereign sector than in Q311, with 41% of respondents now expecting deterioration, up from 32%.
For details, see European Senior Fixed Income Investor Survey Q411
U.S. banks could be greatly affected if contagion continues to spread beyond the stressed European markets (Greece, Ireland, Italy, Portugal, and Spain), according to Fitch Ratings.
Net Exposures Manageable: Large U.S. banks have been reducing direct exposure to stressed markets for well over a year. Overall, net exposure appears manageable but not without financial costs. Aggregate net exposure to these markets totaled approximately $50bn at 3Q11 for the six largest U.S. banks (Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley). Exposure averaged 0.5% of total assets and less than 9% of Tier 1 common capital (T1C).
Exposure to Italy and Spain: Exposure to stressed markets is believed to be generally concentrated in larger markets, notably Italy and Spain. Although Fitch Ratings views the direct exposures to Spain and Italy as manageable, the broader ramifications of distress in these markets will have meaningful consequences beyond direct exposure if not contained.
Fitch believes that, unless the eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken. Currently, Fitch’s rating outlook for the U.S. banking industry is stable, reflecting improved fundamentals at most banks, coupled with generally lower ratings versus pre-crisis levels.
Risks Increasing: The risks of a negative shock are rising and could alter Fitch’s stable rating outlook for U.S. banks. Fitch’s base case rating assumption underpinning bank ratings is that eurozone sovereign debt concerns will be dealt with in an orderly fashion, i.e. there will not be a disorderly debt restructuring or forced exit of any country from the euro.
For the full report see U.S. Banks – European Exposure (Direct Exposures to GIIPS Manageable, Contagion Risk Chief Concern)
Private firms continually weigh the pros and cons of going public. New research from John Asker, Joan Farre-Mensa, and Alexander Ljungqvist suggests there may be another reason to remain private: increased willingness to invest to become more competitive.
We suggest that the patterns we document are most consistent with theoretical models emphasizing the role of managerial myopia.
In evaluating the investment practices of stock market-listed and privately held firms in the US, the researchers discovered that “private firms invest substantially more than do public firms matched on size and industry ” (10 percent of total assets versus 4 percent), and that private firms “are 3.5 times more responsive to changes in investment opportunities than are public firms….”
Public firms may suffer in this regard because of conflicting interests between management and investors, and because shareholders use their liquidity to sell when times get tough rather than to pressure management. Read the working paper, Comparing the Investment Behavior of Public and Private Firms
Fitch Ratings says that banks that use an internal-ratings based approach for regulatory capital may be tempted to increase their capital ratios by reducing the risk weightings they assign to their assets.
While not new, this practice has received more attention in recent weeks because it has been cited by several banks as a way to help meet the European Banking Authority’s temporary 9% core tier 1 capital requirement by mid-2012.
If Fitch deems the adjustments to be excessive, it might lead to a further analysis of the bank’s risk management function.
A bank’s risk weighted capital ratios consists of a numerator, the amount of capital, and a denominator, the amount of risk. The amount of risk is determined by the risk weightings of the assets. Reducing the denominator may give a bank a higher capital ratio, but if it is achieved purely through changing modelling assumptions it does not change the risk profile of the bank. This is therefore likely neutral for a bank’s ratings.
For details, see Fitch: Cutting Risk-Weights to Boost Capital Won’t Alter Risk