The fallout from declining real estate markets will also affect areas of the financial sector, such as regional banks and mortgage-related institutions that have large exposure to the real estate markets, real estate brokers, and developers. The banking sector overall will be supported by continued economic expansion, albeit at a slower pace, and reasonably strong financial asset markets. Nonetheless, there are growing pressures from an inverted yield curve and stiff competition for loans and deposits. Further, the growth rate of demand for new loans is expected to slow in both consumer and commercial credit in 2007.
Within the industrial sector, the machine tools industry is vulnerable to slowing domestic growth and a weak domestic autos industry. Building materials and related chemicals industries are vulnerable to an adverse construction sector, while the U.S. textiles industry continues to see deadly competition from foreign suppliers.
The greatest improvement in credit quality in 2007 is expected to be in the telecommunication, utilities, insurance, and healthcare sectors. Strong growth in profits and free cash flow contribute to the improvement in telecommunication services' credit quality. Real revenue growth and profitability are high in comparison to most other sectors, driven by strong wireless growth. Additionally, there is a wave of industry consolidation that is coinciding with improving pricing conditions, aggressive cost cutting, and a positive regulatory environment. The healthcare sector, in general, is also expected to fare relatively well, due in part to its defensive, non-cyclical characteristics and driven by its robust prospects for future earnings growth due to positive demographics, new technology, and pricing power. The insurance sector will benefit from fewer natural disasters in 2006, such as hurricanes, reasonably strong asset markets, and robust demand for products. In addition, the industry's pricing power remains strong, although it has slowed from previous years.
Among those industries that are already rated as being in a high-risk category, several are expected to show improvement in 2007, including motor vehicles and parts, watches and clocks, and computing hardware. While these industries had previously seen declines in credit quality, in 2007, they are expected to stabilize and even show a slight improvement over 2006.
Global Insight's Sector Risk Ratings are produced as part of our World Industry Service and are updated quarterly. These risk ratings are designed to assist credit analysts and asset managers in identifying the best prospects for movements in sector credit quality on a comparable basis across industries and across countries.