ADVERTISEMENT

Time to Look for Gems in This Secular Stagnation: Taking Stock

Time to Look for Gems in This Secular Stagnation: Taking Stock

(Bloomberg) -- You wouldn’t be able to tell by looking at this year’s rally and the collapse in volatility, but: investors are positioned for “secular stagnation” and the most crowded trade is still “short European equities,” according to the latest Bank of America Merrill Lynch fund manager survey. After such a strong first quarter, it might be good for investors to start digging for hidden value. Sweden could be a good place to start.

The sell-off that hit Swedish banking stocks with Baltic exposure in the wake of the money-laundering scandal is an interesting case. It has now made these stocks the most attractive in terms of return potential in Sweden, according to analyst consensus. And banks are very relevant to the OMX benchmark: their combined weight accounts for about a fifth of the index.

Time to Look for Gems in This Secular Stagnation: Taking Stock

Swedbank, SEB and Nordea, which are among the five worst performers on the OMX Stockholm 30 Index, are also among the benchmark’s stocks with the highest return potential. Swedbank has 26 percent upside in the next 12 months, based on the difference between the average analyst price target and the current share price.

Of course, the Swedbank scandal is far from over. But what’s interesting is that analysts have had time to assess the potential damage. Swedbank’s average price target has been slashed 20 percent during the past four weeks. Yet, the consensus is still positive relative to current price.

In short, the revenue decline has been priced in, while the capital buffer of $1.2 billion could be deemed sufficient to absorb potential fines, at least in a base case scenario. On the other hand, the 75% dividend payout could be at risk - the stock trades on a hefty ~9% dividend yield. Swedbank will release earnings on April 25, so investors will pay attention to the update of the biggest laggard among European banks.

Time to Look for Gems in This Secular Stagnation: Taking Stock

As for the other banks, targets of SEB, Nordea and Handelsbanken were only cut by 1.3-3.3 percent. SEB and Nordea have good upside potential, judging by analyst targets, while Handelsbanken is fairly valued. Ironically, the bank has no exposure to the Baltic states, as it chose Britain for its overseas expansion back in the day.

On the other side of the analysts’ scope in Sweden, there is H&M. The stock was one of the dogs of both the retail sector and the OMX in 2018, but things have changed. The stock is up 30 percent this year after reassuring the market during the first quarter, but analysts seem to think it has gone too far.

Time to Look for Gems in This Secular Stagnation: Taking Stock

Upgrades were scarce on H&M. There is skepticism from the sell-side surrounding the shares, with a majority of the analysts tracked by Bloomberg still keeping a sell rating. Looking at the chart above, the rally seemed to have been driven in part by short covering, with short interest falling from 18 percent to less than 14 percent of free float in a month, according to IHS Markit.

Ahead of the open, Euro Stoxx 50 futures are little changed.

SECTORS IN FOCUS TODAY:

  • Watch miners as iron ore prices sink after Brazil’s Vale said it will restart operation at a major mine in the next 72 hours, but Chinese economic growth unexpectedly held firm in the first quarter. Watch shares in companies like BHP, Rio Tinto, Anglo American and Ferrexpo among miners and keep an eye on steel stocks including ArcelorMittal and Evraz.
  • Watch the tech sector after chip giant Intel said it’s abandoning its plan to break into the mobile-phone industry, just as Apple and Qualcomm managed to reach a settlement on their long-running dispute and sealed a long-term supply deal. Streaming giant Netflix dropped before paring those losses last night after its outlook disappointed investors in the face of Walt Disney’s cut-price Disney+ streaming network.
  • Watch banks as ING Groep is reportedly taking a look at Commerzbank as the saga around a possible merger with Deutsche Bank AG rumbles on. The merger continues to pick up opposition from unions and the German government, which would need shares in Commerzbank to triple just to make back the money used to bail it out in the financial crisis.
  • Watch Juventus, Ajax shares after the Italian soccer team was knocked out of the UEFA Champions League by the Dutch outsiders on Tuesday.
  • Watch FX markets as a volatility explosion may be just around the corner, according to some strategists. There’s how to prepare if and when it does get going. There are also warning signs flashing on the dollar in the options market, with investors the most pessimistic in a year on the outlook for the greenback.

COMMENT:

  • “The banking sector’s fundamentals remain complicated but a less worrying macroeconomic environment and especially the recognition by the ECB of the side effects of negative rates argue in favour of a temporary outperformance,” Oddo strategist Sylvain Goyon writes in a note. “The ECB’s new tone opens the door to the "fantasy" of a rebound in the interest margin (negative TLTRO rate?). This ideal dimension, in a market tired of being invested in historically expensive "quality” vs value stocks, could fuel a tactical rally. We prefer CASA, Caixabank, Unicredit.”

COMPANY NEWS AND M&A:

  • Roche Ups 2019 Sales Growth Guidance; 1Q Revenue Beats (1)
  • ASML 2Q Net Sales View Midpoint Matches Est; Confirms 2020 Goals
  • Ericsson First Quarter Net Sales 1.1% Above Estimates (1)
  • Santander, Credit Agricole to Combine Custody, Servicing Ops (1)
  • Danone Confirms 2019 Guidance as 1Q LFL Sales Growth Meets Est.
  • ABB First Quarter Revenue Meets Estimates
    • ABB CEO Spiesshofer Steps Down, Peter Voser Named Interim CEO
  • GAM Posts $4 Billion Outflows, Absolute Return Wind-Down by July
  • Swedbank Scandal Spreads to Latvia as Browder Seeks Wider Probe
  • Handelsbanken First Quarter Net Income Beats Highest Estimate
  • Europe Car Market Drop Worsens in March Led by Italy, Spain
  • BHP Forecasts Annual Iron Ore Output to Fall on Cyclone Impact
  • TomTom Maintains Full Year Gross Margin Above 70%
  • Panalpina 1Q Ebit, Ebitda Broadly in Line With Estimates (1)
  • Sulzer 1Q Orders Rise to CHF984.1m, Confirms Outlook for FY 2019
  • Elisa First Quarter Comparable Ebitda 1.3% Above Estimates
  • Cellnex Hires Goldman Sachs to Prepare Offer for TDF: Expansion
  • Vinci Says No Negotiations With France on Airport Compensation
  • Vopak First-Quarter Adjusted Ebitda Rises to EU214.6 Million (1)
  • BillerudKorsnas First Quarter Net Sales Beat Highest Estimate
  • Deutsche Post Expects to Sees ‘Decent’ Growth Rate This Year

NOTES FROM THE SELL SIDE:

  • The cash and margin outlook for the European clothing retail sector is improving, RBC writes in a note. Preferred stocks remain Primark-owner AB Foods and Next in the U.K. (both rated outperform), Inditex in mainland Europe (rated top pick). Given improved backdrop, analyst raises PTs for U.K. retailers including Next, Marks & Spencer (sector perform), Kingfisher, Dunelm (both underperform) and WH Smith (outperform).
  • RBC says BHP Group’s result is softer than expected even though the downside risk to iron ore output was flagged. BHP will continue to benefit from higher iron ore prices, although not as much as peers Rio Tinto and Fortescue.

TECHNICAL OUTLOOK for Stoxx 600 index:

  • Resistance at 392.7 (July high); 403.7 (100% Fibo)
  • Support at 385.7 (76.4% Fibo); 374.5 (61.8% Fibo)
  • RSI: 68.3

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

  • Resistance at 3,516 (76.4% Fibo); 3,596 (May high)
  • Support at 3,403 (61.8% Fibo); 3,309 (50% Fibo)
  • RSI: 70.4

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

  • Ackermans upgraded to buy at Kepler Cheuvreux; PT 160 Euros
  • BIC upgraded to neutral at MainFirst; Price Target 76 Euros
  • Brenntag upgraded to buy at Berenberg
  • D’Ieteren upgraded to buy at Kepler Cheuvreux; PT 50 Euros
  • Demant upgraded to equal-weight at Morgan Stanley; PT 205 Kroner
  • EDP Renovaveis upgraded to buy at SocGen; PT 10 Euros
  • Intertrust upgraded to overweight at JPMorgan; PT 19 Euros
  • Repsol Upgraded to Hold at Jefferies
  • Sampo upgraded to overweight at JPMorgan; PT 48 Euros
  • Tele Columbus upgraded to overweight at Barclays; PT 2.70 Euros

DOWNGRADES:

  • Caverion downgraded to reduce at Inderes; PT 6.10 Euros
  • GTT downgraded to hold at SocGen; Price Target 95 Euros
  • IMCD downgraded to hold at Berenberg
  • Nixu downgraded to reduce at Inderes; PT 12 Euros
  • Valmet downgraded to sell at Berenberg

INITIATIONS:

  • AJ Bell rated new neutral at Macquarie; PT 3.45 Pounds
  • Alcon rated new buy at Goldman; PT 65 Francs
  • Altice Europe resumed at citi with Neutral
  • Burberry rated new underperform at Bernstein; PT 17.25 Pounds
  • Saint-Gobain rated new neutral at Citi; PT 38 Euros

MARKETS:

  • MSCI Asia Pacific up 0.4%, Nikkei 225 up 0.3%
  • S&P 500 up 0.1%, Dow up 0.3%, Nasdaq up 0.3%
  • Euro up 0.27% at $1.1311
  • Dollar Index down 0.14% at 96.9
  • Yen up 0.01% at 111.99
  • Brent up 0.4% at $72/bbl, WTI up 0.7% to $64.5/bbl
  • LME 3m Copper up 0.5% at $6524.5/MT
  • Gold spot up 0.1% at $1278.4/oz
  • US 10Yr yield up 1bps at 2.6%

MAIN MACRO DATA (all times CET):

  • 10am: (EC) Feb. ECB Current Account SA, prior 36.8b
  • 10am: (IT) March CPI FOI Index Ex Tobacco, prior 102.3
  • 10am: (IT) March CPI EU Harmonized YoY, est. 1.1%, prior 1.1%
  • 10am: (IT) Feb. Current Account Balance, prior 3m
  • 10:30am: (UK) March CPI MoM, est. 0.2%, prior 0.5%
  • 10:30am: (UK) March CPI YoY, est. 2.0%, prior 1.9%
  • 10:30am: (UK) March CPI Core YoY, est. 1.9%, prior 1.8%
  • 10:30am: (UK) March Retail Price Index, est. 285.7, prior 285
  • 10:30am: (UK) March RPI MoM, est. 0.2%, prior 0.7%
  • 10:30am: (UK) March RPI YoY, est. 2.6%, prior 2.5%
  • 10:30am: (UK) March RPI Ex Mort Int.Payments (YoY), est. 2.6%, prior 2.4%
  • 10:30am: (UK) March PPI Input NSA MoM, est. 0.3%, prior 0.6%
  • 10:30am: (UK) March PPI Input NSA YoY, est. 3.9%, prior 3.7%
  • 10:30am: (UK) March PPI Output NSA MoM, est. 0.2%, prior 0.1%
  • 10:30am: (UK) March PPI Output NSA YoY, est. 2.1%, prior 2.2%
  • 10:30am: (UK) March CPIH YoY, est. 1.9%, prior 1.8%
  • 10:30am: (UK) March PPI Output Core NSA YoY, est. 2.3%, prior 2.2%
  • 10:30am: (UK) Feb. House Price Index YoY, est. 1.2%, prior 1.7%
  • 10:30am: (UK) March PPI Output Core NSA MoM, est. 0.1%, prior 0.1%
  • 11am: (EC) Feb. Trade Balance SA, prior 17b
  • 11am: (EC) Feb. Trade Balance NSA, prior 1.5b
  • 11am: (EC) March CPI Core YoY, est. 0.8%, prior 0.8%
  • 11am: (EC) March CPI MoM, est. 1.0%, prior 0.3%
  • 11am: (EC) March CPI YoY, est. 1.4%, prior 1.4%
  • 11am: (IT) Feb. Trade Balance EU, prior 907m
  • 11am: (IT) Feb. Trade Balance Total, prior 322m

To contact the reporters on this story: Hanna Hoikkala in Stockholm at hhoikkala@bloomberg.net;Michael Msika in London at mmsika4@bloomberg.net

To contact the editor responsible for this story: Blaise Robinson at brobinson58@bloomberg.net

©2019 Bloomberg L.P.