S&P: healthcare, media, consumer products, retailing to benefit from economic recovery

By Ronda Fears

Nashville, Tenn., June 20 - While the economic recovery will be slow, S&P analysts said in a conference call Thursday that healthcare has the best credit quality but media and entertainment, consumer products and retailing also stand to benefit the most as the economy improves.

"The economy overall is still doing pretty darn well," S&P chief economist David Wyss said during the call, which focused on the second half 2002 prospects for corporate credits.

While economic recovery has begun to slow, and is expected to remain sluggish during the second half of the year, Wyss said government spending is on the rise and interest rates are now not expected to be boosted until January.

"The good news is there's no inflation out there," Wyss said.

"The bad news is that there's no pricing power out there for corporations."

Thus, the economist said that housing construction is expected to remain strong, in part because of the anticipated delay in interest rate hikes.

Also, he said, the lack of pricing power will keep the stock markets stunted.

From a corporate credit quality standpoint, S&P analyst John Bilardella said healthcare is the strongest and expected to continue to improve.

Pharmaceuticals are also strong, he said, especially in terms of liquidity, but "we do have some concern about the new drug prospects."

Media and entertainment, consumer products and retailing stand to benefit the most from economic recovery, Bilardella said.

Telecom has suffered a loss of investor confidence and from declining credit quality.

Technology credits also have suffered severely, but he said it appears that the group has hit a trough.

"A decidedly negative trend continued in the first half and that's likely to only marginally improve in the second half," Bilardella said.

"The good news is that it appears to be the trough."

Transportation credits are not very promising, either, he said, noting that all 13 major U.S. airlines remain unprofitable and all are either on negative watch or have a negative outlook.

Energy and power credits, he said, are expected to be "dismal" for the remainder of the year.

S&P analyst Mark Bachman said the financial services group also faces a challenging environment, but banks are seen faring better than insurance and broker/dealers.

"Despite all this, bank profitability has remained quite well," Bachman said, noting that 75% of the banking credits have a stable outlook.

Most broker/dealers, however, have negative outlooks, he said, reflecting the difficulty in their markets.

S&P analyst Diane Vazza said corporate issuance is expected to continue tracking lower, but defaults are seen trailing off.

"Conservatively, we're looking for corporate bond issuance to be down 25% from last year," Vazza said, adding, "We think the worst is over with regard to defaults."

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