OREANDA-NEWS. The stable sector outlook for global tobacco in 2016 reflects Fitch Ratings' expectation of strong pricing power stemming from relatively inelastic demand, strong margins supported by active cost rationalization and broad brand portfolios, both geographically and across the value chain. These factors should outweigh industry headwinds, such as secular cigarette volume declines, slowing emerging market economies, and regulatory and litigation risks.

Fitch sees modest respite in 2016 for tobacco manufacturers from ever-present volume pressure as cigarette smoking rates decline in most countries due to government regulation, health concerns or viable substitution using other tobacco products. Fitch expects moderation in the historical rate of decline (1% to 3%, excluding China) seen this year carrying into 2016, helped by improving economic conditions in key markets and in the absence of restrictive regulatory decisions.

The negative rating outlook accounts for pressured financial profiles of European tobacco companies during 2016 as firms cope with higher leverage and compressed cash flows due to aggressive capital deployment and currency headwinds. Fitch anticipates steady financial profiles for U.S. tobacco manufacturers that stand to benefit from lighter cigarette volume declines as well as a favorable product mix shift, given an expected continuation or increased discretionary income in the hands of the U.S. smoking population.

Fitch expects some recovery during 2016 of leverage headroom, eroded from prior aggressive capital deployment by most tobacco players, through a combination of debt reduction and operational improvement. However, the credit measures for the Fitch-rated European names will remain at levels inconsistent with their ratings in 2016, as such, further pressure on leverage, either operationally or financially, could warrant negative rating actions.