OREANDA-NEWS. Fitch Ratings expects M&A activity to pick up for capital goods companies in the next six to 12 months. Despite increased regulatory risks, tightened tax inversion rules and political uncertainties, including the fallout from the UK's vote to leave the European Union, delaying transactions, Fitch believes that interest in the market remains intact and that M&A activity in the capital goods sector will maintain healthy growth.

We expect any M&A to have limited direct impact on ratings since most companies in our portfolio have gained headroom in their ratings over the last three years and will conservatively finance potential transactions. However, major acquisitions could threaten ratings if they are combined with more aggressive shareholder-friendly strategies, including share buyback programmes.

Despite ongoing consolidation and business realignments, Fitch does not expect sharp declines in cash balances or significant increases in leverage metrics for most capital goods companies. Restructuring programmes and disposals over the past two years have led to strong balance sheets that could support M&A without having a major impact on the capital structures of our rated capital goods corporates. As illustrated by Philips Lighting's current EUR1.5bn IPO, recent investor appetite in stock markets is also supporting business realignments without weighing on leverage metrics.

Manufacturing companies seeking leading market shares will continue driving M&A in green energy, technology and healthcare. In addition, company valuations at historical lows in traditional manufacturing sectors will accelerate the consolidation of oil & gas, construction and mining equipment producers.

Excess capacity built up in emerging markets in core infrastructure and industrial sectors, along with unfavourable economic conditions, will shift the focus of EMEA capital goods companies back into mature markets. Fitch expects increased focus on European and US markets both in terms of M&A activity and greenfield investments, driven by better visibility on economic growth, combined with historically low interest rates. The announced merger between Siemens' (A/Stable) wind business and Gamesa is likely to be one of the largest deals in 2016, creating a market leader in the wind energy market.

Fitch believes also that Chinese corporates will remain active investors in mature economies, notably Europe and the US, after investing a record USD60bn outside their borders in 2015, to acquire new technologies and to rebalance their significant exposure away from their domestic economy. Despite regulatory setbacks, Go Scale Capital from China was still among the interested parties in Royal Philips's Lighting unit this year. Earlier in 2015, Go Scale Capital's planned acquisition of another business unit of Royal Philips (A-/Negative) fell through after it failed to receive approval from the Committee on Foreign Investment in the US.