Given that corporate earnings have been weak this year, it is somewhat surprising that equity markets have remained so buoyant. Stock prices have recovered from early 2016 fears regarding China's economy and low oil prices as well as June's reaction to the United Kingdom's vote to leave the European Union. Morningstar's director of economic analysis, Bob Johnson, has started to forecast a slowing of the U.S. economy as a result of such factors as weaker auto demand and the end of the Affordable Care Act boost in healthcare spending. Overall, our analysts find our coverage universe to be slightly overvalued.
The financial-services sector became less undervalued during the quarter, in part because our analysts lowered their fair value estimates for several U.K. banks such as Barclays. After Brexit in late June, we lowered our assumptions for loan growth and fees while increasing our funding cost assumptions. Although the trade implications of the U.K. leaving the EU will take time to show, companies such as Lloyds have already begun to act by closing branches, laying off employees, and selling property.
Chinese banks generally reported slowing growth in the first half of the year, and we don't expect much change in the near term. Fee income weakness was in settlement and financial consulting services, and certain price cuts in bank card and settlement-related fees, and lower growth in income related to wealth-management products as interest-rate spreads narrowed. For net interest income growth, the banks broadly recorded a mid-single-digit decline, attributable to loan rates repricing 125 basis points after five interest-rate cuts in 2015; the value-added tax reform that started in May; and lower interbank asset returns and banks increasing their allocation toward bond investments.
Asset quality outlooks were mixed, as all banks saw lower bad debt formation. By industry, wholesale, manufacturing, and mining are major sources of bad debts, while transportation, utilities, leasing, and commercial services improved. Eastern and coastal areas still reported higher percentages of nonperforming loans than other regions, but with decelerating growth in these areas. Credit quality deteriorated faster in middle and western China, including Shanxi, Jiangxi, Henan, and inner Mongolia. Loans to small and midsize enterprises are also challenging.
Three major trends are defining the healthcare sector in 2016. First, the media have given high drug prices increased attention, and both presidential candidates promise to lower drug costs for Americans. Although our healthcare team forecasts that older generic drugs will indeed face increased pricing pressure going forward, innovative drugs should maintain their pricing power for the next several years. Second, drug companies have halved the time it takes to bring a drug to market compared with a decade ago, thanks to scientific advancements and more-accommodative regulations, particularly in oncology and immunology. These successes augur well for attractive and sustainable economic profits.
Third, low interest rates and a search for growth have encouraged numerous acquisition and merger attempts. Given the environment, investors should be concerned about value destruction through M&A activity. For example, our analysts assessed Pfizer's acquisition of Medivation as overvalued (mitigated by the size of the deal relative to Pfizer's enterprise value), and regulators have stopped acquisitions in the drug and managed care industries. Our top picks in healthcare are Allergan where investor concerns about the broad specialty pharma industry are overshadowing the company's innovative pipeline; Roche whose drug and diagnostics portfolio is being undervalued by the market; and Elekta, which despite company-specific concerns, is still well-positioned in the strong-growth radiotherapy market.
While our energy sector analysts expect oil prices to recover through 2018, they are bearish on oil long term. They expect U.S. shale oil production to start growing again in 2017 despite still-below-peak rig counts thanks to efficiency gains, drilled-but-uncompleted wells being brought on line, and falling decline rates. Our team's long-term oil price assumption is $55 per barrel for West Texas Intermediate, based on the argument that U.S. shale can supply much more crude oil than the world will actually need.
Our basic materials analysts find much of the sector overvalued, given below-consensus long-term expectations for aluminum, copper, iron ore, and steel prices. Industrial metal and steel prices rallied strongly this year as an increase in Chinese fixed-asset investment boosted demand. However, our analysts argue that the credit growth fueling the fixed asset investment is outpacing actual economic growth, and the presumed overinvestment in metals-intensive projects will ultimately lead to disappointing Chinese demand. To illustrate, we expect Chinese steel demand to fall to 653 million metric tons in 2020 compared with consensus expectations for 710 million metric tons of demand in 2020 and the peak of 765 million metric tons reached in 2013.
Gold has remained relatively steady in the low- to mid-$1,300 per ounce range over the past few months, holding onto the massive gains from earlier this year. However, through mid-afternoon Oct. 4, gold has fallen more than 3% to roughly $1,270 per ounce as the U.S. Federal Reserve looks likely to raise rates by the end of 2016. As a result, gold miner stocks have fallen by roughly 10% or more.
As we have stated throughout the year, we believe that the investment-driven rally this year had been built on a shaky assumption that real interest rates would remain accommodative to gold for an extended period of time. While we expect a higher interest rate environment will weaken the attractiveness of gold as an investment, we still believe gold has a promising future of consumer demand and forecast a nominal gold price of $1,300 per ounce in 2020. We expect that in the long term, Chinese and Indian jewelry demand will fill the gap left by investment demand. However, the rise of consumer demand will take time, which means significant downside risk in the near term. As a group, gold miners remain relatively overvalued. we still think there's room for all gold miner stocks to fall in the near term. As a result, we recommend gold investors best wait for the dust to settle.
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