OREANDA-NEWS. Fitch Ratings expects that limited developed-market organic growth in the negative 2% to positive 2% range will persist in 2016 given changing consumer preferences, geopolitical tensions in European markets, and bargain-hunting consumers.

Several key emerging markets such as Brazil and Russia are currently in recession with depreciating currencies. Nonetheless, despite the short-term pressure Fitch anticipates that the faster per capita income growth, increasing urbanization and higher birth rates bode well for companies such as Nestle and Unilever in the medium term. Organic growth rates are still in the enviable high-single-digit range for Nestle and Mondelez.

Persistently low organic growth rates and a surge in activist presence are leading to portfolios being oriented toward improving the top and/or bottom line. Bolt-ons with faster growing natural/organic brands, geographic expansion in the emerging markets such as Kellogg's recent acquisitions in Africa, and executing significant cost reduction initiatives will continue to be the order of the day next year.

Restructuring savings and commodities should provide a tailwind in 2016. However, cash costs related to restructurings should peak next year, pressuring free cash flow (FCF) margins particularly for Mondelez, which is expected to see negative FCF. Fitch expects FCF margins for rated companies to decline about 70bps to 1.7% in 2016.

While the sector generally has substantial liquidity and financial flexibility, companies adopting more aggressive financial strategies particularly as a result of increased activist presence could see negative rating actions.

Upgrades are unlikely, though Mondelez and Kellogg, which currently carry Negative Outlooks, could be stabilized if they sustain positive low-single-digit volume growth and restructuring savings lead to improved margins or are reinvested to grow the business.