Sector Risks: What to watch this year

Last year was more challenging than expected for this sector. In most cases, textile and clothing output sales fell (or at best remained stable) due to weak demand.

International trade – which accounts for a third of total output of the sector - was down.

The good news is that the outlook for 2017 is less grim. Price increases have resumed due to firmer demand prospects. Textile and clothing producer prices are forecast to rise this year, both in the United States and China.

As a result, exports should also increase, should no major event upend international trade. Of course, a rise in protectionist mood and the termination of Trans-Pacific Partnership trade deal talks could hurt the sector. Tariffs and regulations are already high and could impede sector growth.

Low commodity and consumer prices last year weakened retailers’ pricing power. Due to this, the sector’s profitability hit its lowest level in six years in 2016. Indebtedness also skyrocketed, particularly in electronics (including e-retailers). This combination of weakening profits and rising debts will be a key concern for the sector in the light of rising interest rates.

However, consumer spending is expected to recover, which could raise retailers’ margins. The key here will be retailers’ distribution format - e-commerce and omni-channels are crucial: by 2020 e-commerce could represent 15 percent of worldwide retail sales.

Also, the lines between grocery (food, beverages, and home appliances) and non-grocery retailers (furniture, sporting goods, office supplies, etc) will continue to blur, resulting in relentless product range diversification.

The car industry is facing challenging times – the rise of the sharing economy, new partnerships with disruptive tech companies, the race to launch autonomous vehicles as well as diesel scandals. Yet, a global presence remains a must for carmakers to benefit from global growth.

The three key markets for sales are China, the United States, and Europe. Brazil and Russia continue to suffer from the economic crisis and high volatility, but a subtle recovery is expected in 2017. Needless to say, car manufacturers need to adapt their offerings to stay competitive.

Low-cost models should be rolled out for India, larger sport utility vehicles (SUVs) for the United States, and medium and premium models across all markets.

Growth in the construction sector will remain slow. Production is rebounding in advanced economies but slowing in emerging countries. Strong cyclicality and cross-country differences make for an even more complex picture. In particular, the sector faces headwinds in oil-exporting countries as oil prices are decisive for infrastructure investments.

In the United States, the sector will be influenced by the decisions of the new government. Other countries, such as China, will continue to face difficulties related to the inflation in residential property prices.

This sector is one of the riskiest, with several countries facing a negative outlook. It comprises mainly small firms with very high leverage ratios, contributing to its structural weakness and price pressures. In general, the sector remains quite sensitive to changes in interest rates and public stimulus plans.

The prescription drug market is expected to grow in 2017. This is especially the case for cheap generic and biosimilar drugs due to patent expirations.

Big drugmakers will continue to struggle with governments’ tightening of cost controls and growing criticism about soaring prices of new medicines.

But as long as they continue to cash in on their strong ‘pricing power’ of bringing innovative drugs to market, they will secure pharmaceuticals bullish market position.

We will continue to see political rhetoric on drug price gouging throughout 2017, particularly in the United States.

Dr Lorenz Weimann
Allianz SE
Phone +49 893800 16891

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