JP Morgan advises caution on European chemicals until second half

European chemicals companies will be hit by a wave of external factors this year, so investors should seek refuge in the form of the handful of firms that might still manage to generate profits, albeit modest ones, JP Morgan said.

It was unlikely that consumer demand would help to prop up volume growth and on-going oversupply would likely weigh on prices in the medium-term, analyst Martin Evans said.

Making matters worse, the twin tailwinds from favourable currency movements and falling raw material costs were set to fade away.

Indeed, the Chinese yuan might weaken materially and economic growth become more feeble to boot, Evans added.

Hence, at least until the second half of 2016 – when the outlook for commodity chemicals going into 2017 should be more upbeat – investors should be cautious on the cyclical peers, such as BASF, Solvay and Lanxess, which JP Morgan recommended underweighting.

Akzo Nobel on the other hand could act as a “relative hedge versus commodity producers”, leading Evans to upgrade its shares to overweight.

He also upped his view on Croda due to its niche positioning and slow improvement from a low base.

Evonik, on the other hand, was downgraded from overweight to neutral in anticipation that methionine prices would fall from their lofty heights.