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Protests Push Swatch Near Make-or-Break Point

Protests Push Swatch Near Make-or-Break Point

(Bloomberg) -- In a key week for monetary policy, ECB President Mario Draghi took the market by surprise with dovish comments. The euro weakened, which is good news for exporters including luxury-goods makers, recently hurt by concerns over protests in Hong Kong.

Hong Kong has traditionally been a popular tourist destination for affluent Chinese consumers that are a major factor in luxury-goods sales growth. The former British colony is a historically important market for the industry, representing about 5% of overall sector sales, with above-average profitability, according to UBS analysts.

Protests Push Swatch Near Make-or-Break Point

It’s not just the latest developments that have hit the Hong Kong luxury market. Retail sales were already weaker in recent months, Zuercher Kantonalbank analyst Patrik Schwendimann says. “At least in the short term there will be an additional negative impact on Hong Kong retail sales, which is not helping the investor mood for Swatch and Richemont,” he says. The latter is expected to report sales data on July 18, while Swatch is scheduled to release earnings at the end of July.

  • READ MORE: Swatch, Lacking Bling, Misses Out on 2019 Luxury Stock Rebound

The picture might not be all bleak, though. “The investor mood for Swatch is already quite depressed after the heavy share price correction of the last 12 months,” Schwendimann says. “So ‘buy on bad news’ could already be around the corner.” Looking at the chart, Swatch shares appear close to a very strong support level around CHF250. The stock is the worst performer of the SMI index this year.

Protests Push Swatch Near Make-or-Break Point

Hong Kong accounts for about 10% and 11% of sales for Swatch and Richemont respectively, according to UBS. Burberry follows with 9%. If there’s more disruption, sentiment toward the sector could sour like it did during the 2014 protests.

Back then, the industry’s relative price-to-earnings ratio against the MSCI Europe fell 23 percentage points from peak to bottom, UBS writes. The table below shows current Hong Kong exposure and P/E, as well as average price targets from analysts tracked by Bloomberg.

Luxury Stocks with over 5% sales exposure to Hong Kong
StockHong Kong
as % of sales
Est. P/EAverage
Price Target
(local curcy)
Upside
Potential
Richemont11%22.781.0-0.5%
Swatch10%15.3312.018%
Burberry9%21.41869.74.2%
Hermes8%43.9559.8-11.5%
Kering7-8%19.6558.48.6%
LVMH6%25.4359.8-2.4%
Moncler6%24.839.06.8%
Tod’s6%36.138.1-17%
MSCI Europe13.9
Source: UBS, Bloomberg

There are still big problems lurking. Trade tensions between the U.S. and China that threaten economic growth and consumer spending are more of a risk for luxury-goods companies than the Hong Kong protests, according to Daryl Liew, head of portfolio management at Reyl & Cie in Singapore.

“If the trade tensions do continue, companies will start cutting back and you will get a broader slowdown on the macro side,” Liew says. “People will start tightening their belts a bit.” The prospects of new bilateral talks announced by President Trump ahead of the G-20 might bring some hope.

In the meantime, Euro Stoxx 50 futures are little changed ahead of the open.

  • Watch the pound and U.K. stocks after Prime Minister candidates will be cut to the final two by the end of the week. Boris Johnson extended his lead to quite a significant margin and then used Tuesday’s debate to provide a few more details on how he intends to sort out the Brexit mess. Anyone seeking some real clarity on his plans, or indeed those of his rivals, may be a touch disappointed.
  • Watch for further central bank policy reaction after the ECB surprise move on Tuesday. The Fed decision is due after Europe closes on Wednesday. The attention will be on when the central bank is going to cut rates, with no move expected this week but a quarter-point cut considered the most likely move eventually.

COMMENT:

  • “Weak economic momentum and political risks are still challenges to earnings growth,” BlackRock strategists write in a note. “A value bias makes Europe less attractive without a clear catalyst for value outperformance, such as a global growth rebound. We prefer higher-quality, globally oriented firms.”

COMPANY NEWS AND M&A:

  • Qantas Orders Up to 36 New Airbus Extra-Long-Range Aircraft (1)
  • Adyen Offering by Holder Prices 465k Shares at EU670/Share
  • Renault and Nissan’s Joint Operations Quietly Being Cut: FT
    • Renault to Accept Nissan Proposals for AGM, NHK Reports
  • VW CEO Says Electric Car Shift to Cut Manufacturing Jobs: ZDF
  • Volvo Says It’s “Well Prepared” For Truck Market Correction
  • Colruyt Full Year EPS Beats Estimates
  • Credit Agricole CEO Says Regulatory ‘Noose’ Hindering Growth: FT
  • Pandora CEO Says Delivering on Guidance Will Be Key: Borsen
  • Steinhoff Takes Initial Steps Toward Recovery as Losses Narrow
  • Swedbank Chair Says Decision on New CEO May Come Late Autumn: DI
  • Ericsson Says GCI Selects Ericsson for 5G Rollout in Alaska
  • Bell Food Sees 1H Ebit Below CHF50m Due to Higher Pork Prices
  • Baloise Swiss Property Plans Capital Increase for Acquisition

NOTES FROM THE SELL SIDE:

  • Valuations in the European semiconductor sector have gone full circle since 2016, Morgan Stanley says, giving STMicro and ASML new overweight ratings while ASMI is initiated with equal-weight.
  • ABN Amro upgraded to hold at Berenberg, removing the only sell rating among analysts tracked by Bloomberg, as the broker says overly positive market expectations have now moderated toward its estimates.
  • Alstom is expected to give a raised margin target at its capital markets day, after achieving its previous 7% target, Citi says in a note.

TECHNICAL OUTLOOK for Stoxx 600 index:

  • Resistance at 385.7 (76.4% Fibo); 392.7 (July 2018 high)
  • Support at 381.7 (50-DMA); 374.5 (61.8% Fibo)
  • RSI: 61.5

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

  • Resistance at 3,514 (May high); 3,520 (76.4% Fibo)
  • Support at 3,408 (50-DMA); 3,403 (61.8% Fibo)
  • RSI: 62.4

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

  • ABN Amro GDRs upgraded to hold at Berenberg
  • Adler Real Estate upgraded to buy at Oddo BHF; PT 15.91 Euros
  • Austevoll Seafood upgraded to buy at DNB Markets; PT 101 Kroner
  • Gym Group upgraded to overweight at Barclays; PT 3 Pounds
  • Intertek upgraded to neutral at Oddo BHF; PT 55 Pounds
  • Safran upgraded to add at AlphaValue

DOWNGRADES:

  • AddNode downgraded to hold at ABG; Price Target 150 Kronor
  • Allianz downgraded to hold at Independent Research; PT 230 Euros
  • Essity cut to hold at Pareto Securities; Price Target 320 Kronor
  • Hella downgraded to neutral at JPMorgan; PT 44 Euros
  • Lufthansa downgraded to hold at Nord/LB; PT 16 Euros
  • SGS downgraded to reduce at Oddo BHF; PT 2,450 Francs
  • Ted Baker downgraded to hold at HSBC; PT 9 Pounds

INITIATIONS:

  • 1&1 Drillisch rated new buy at Independent Research; PT 34 Euros
  • ASMI rated new equal-weight at Morgan Stanley
  • ASML rated new overweight at Morgan Stanley
  • Central Asia Metals rated new outperform at Macquarie
  • STMicroelectronics rated new overweight at Morgan Stanley

MARKETS:

  • MSCI Asia Pacific up 0.5%, Nikkei 225 up 1.8%
  • S&P 500 up 1%, Dow up 1.4%, Nasdaq up 1.4%
  • Euro down 0.01% at $1.1193
  • Dollar Index up 0.01% at 97.65
  • Yen up 0.1% at 108.34
  • Brent up 0.1% at $62.2/bbl, WTI up 0.2% to $54/bbl
  • LME 3m Copper up 0.2% at $5958.5/MT
  • Gold spot down 0.1% at $1345.9/oz
  • US 10Yr yield up 1bps at 2.07%

ECONOMIC DATA (All times CET):

  • 10am: (IT) April Current Account Balance, prior 4.04b
  • 10am: (EC) April ECB Current Account SA, prior 24.7b
  • 10am: (IT) April Trade Balance Total, prior 4.63b
  • 10am: (IT) April Trade Balance EU, prior 1.22b
  • 10:30am: (UK) May CPI YoY, est. 2.0%, prior 2.1%
  • 10:30am: (UK) May CPI Core YoY, est. 1.6%, prior 1.8%
  • 10:30am: (UK) May Retail Price Index, est. 288.8, prior 288.2
  • 10:30am: (UK) May CPIH YoY, est. 1.9%, prior 2.0%
  • 10:30am: (UK) May RPI YoY, est. 2.9%, prior 3.0%
  • 10:30am: (UK) May RPI Ex Mort Int.Payments (YoY), est. 2.9%, prior 3.0%
  • 10:30am: (UK) May PPI Input NSA YoY, est. 0.8%, prior 3.8%
  • 10:30am: (UK) May PPI Output NSA YoY, est. 1.7%, prior 2.1%
  • 10:30am: (UK) May PPI Output Core NSA YoY, est. 2.0%, prior 2.2%
  • 10:30am: (UK) April House Price Index YoY, est. 1.3%, prior 1.4%
  • 10:30am: (UK) May RPI MoM, est. 0.2%, prior 1.1%
  • 11am: (EC) April Construction Output MoM, prior -0.3%
  • 11am: (EC) April Construction Output YoY, prior 6.3%
  • 12pm: (UK) June CBI Trends Total Orders, est. -11, prior -10
  • 12pm: (UK) June CBI Trends Selling Prices, est. -3, prior -1

To contact the reporters on this story: Albertina Torsoli in Geneva at atorsoli@bloomberg.net;Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon

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