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France's Edge Over Germany Carries a China Risk

France's Edge Over Germany Carries a China Risk

(Bloomberg) --

Even though German stocks outperformed on Friday, the trade-sensitive DAX has struggled recently in comparison to France’s CAC 40. Things might change, however, as German equities could benefit from fiscal stimulus and a weaker euro, while signs of deterioration in China’s economy -- just look at the PMI released on Saturday -- and protests in Hong Kong are set to hurt French luxury stocks.

French stocks have outpaced their German peers since 2018, and further widened the gap since the start of the year, with or without the inclusion of dividends (as a total-return index, the DAX includes dividends unlike the CAC).

France's Edge Over Germany Carries a China Risk

In terms of regional exposure, the CAC is more balanced than the DAX, which reflects the dependence of the German economy to exporters, AlphaValue analysts write. About 30% of the CAC’s revenue comes from America and Asia, while the DAX has a 42% combined exposure to the two regions, they say.

But the devil is in the detail. Companies in the CAC are expected to post earnings growth of 12% on average in 2020, and 32% of this increase is attributable to just three stocks: Total (15%), and luxury-goods companies Kering (7%) and LVMH (7%), according to AlphaValue. This makes a significant part of their fortunes subject to crude prices (linked to global growth), Chinese demand and tariffs, the analysts write.

France's Edge Over Germany Carries a China Risk

Also, the tide could be turning for German stocks. Some investors have already started to regain hope that much of the trade uncertainty and recession fears are already reflected in the benchmark.

Meanwhile, a summer of profit warnings saw earnings-estimates cuts for Germany, led by the automotive and industrial sectors, suggesting a lower the bar for the next reporting season.

France's Edge Over Germany Carries a China Risk

Stimulus could be the key to turbo-charge a rather dull German economy. Its manufacturing industry, previously an engine for Europe, has suffered from slowing global growth and demand. The German PMI manufacturing index has fallen deeper into contraction territory, while France’s economy has been more resilient so far.

And Germany’s government could loosen its grip on a tight fiscal policy if things turn sour. To please pan-European politicians, a potential stimulus program could focus on mitigating climate change and develop environmental technology, Jefferies analysts write. That area that could make up almost 20% of Germany’s GDP by 2025, they said, with companies such as Gea Group, EON or Nordex the potential beneficiaries.

France's Edge Over Germany Carries a China Risk

In the meantime, Euro Stoxx 50 are little changed ahead of the European open, while S&P 500 futures are down 0.4%.

  • Watch European stocks exposed to Argentina after the country imposed capital controls aimed at containing its escalating financial crisis. Watch BBVA, Tenaris, Salini Impregilo, Prosegur, Telefonica among others.
  • Watch German real estate companies after TLG Immobilien bought a 9.99% stake in larger rival Aroundtown and started merger talks between the two. Watch other landlords including Deutsche Wohnen, Adler Real Estate and Vonovia.
  • Watch Insurance companies and equipment rental firms as Hurricane Dorian hit the Bahamas and tied as the strongest hurricane to hit land in the Atlantic ever. Watch European reinsurance firms including Munich Re, Scor, Swiss Re and Hannover Re. Also watch specialist insurers like Lancashire, Beazley and Hiscox.
  • Watch nickel-exposed miners as the metal rallied to the highest level since 2014 following a ban on ore exports from Indonesia announced last week. Watch Eramet, Aperam, Norilsk Nickel.

COMMENT:

  • “The recent rally in gold prices accompanied by a decline in copper has led to a 25% yoy decline in copper-to-gold ratio – in our opinion, this ratio provides a long-term sentiment index of growth versus risk while taking away the impact of the U.S. dollar,” Citi analysts write in a note. “The recent moves in prices have led the ratio to dip below 4x. In the past 30+ years, the ratio has dipped below 4x only four times and the last two were during 2008-09 recession and 2015-16 mining/commodities downturn.”

COMPANY NEWS AND M&A:

  • TLG Immobilien Builds Stake in AroundTown and Opens Merger Talks
  • Swedbank Chairman Persson Has Bought Shares for About SEK3.1m
  • EQT Plans IPO on Nasdaq Stockholm to Boost Investments (1)
  • Rio Says Triggered Arbitration With Liberty House On Smelter
  • HSBC Plans to Lend Extra GBP35B to U.K. Home Buyers: FT
  • Old Mutual 1H Profit Drops As Ops Discontinued, Costs Rise
  • CGG Raises FY Goals, Sees Positive Net Cash Flow This Year
  • Osram Strikes Back at Lighting Science for Royalties on LEDs
  • Implenia Wins CHF355 Million Infrastructure Order in Sweden
  • Biggest Dubai Bank Seeks to Raise Foreign Ownership Limit to 40%

TECHNICAL OUTLOOK for Stoxx 600 index:

  • Resistance at 381.2 (50-DMA); 395.1 (July high)
  • Support at 371.4 (200-DMA); 365.5 (50% Fibo)
  • RSI: 55.2

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

  • Resistance at 3,435 (50-DMA); 3,515 (May high)
  • Support at 3,403 (61.8% Fibo); 3,309 (200-DMA); 3,239 (June/August low)
  • RSI: 55.5

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

  • Alstria Office raised to overweight at Morgan Stanley
  • Elekta upgraded to buy at SEB Equities; PT 145 Kronor
  • Naturgy upgraded to buy at Kepler Cheuvreux; PT 26 Euros
  • Smart Metering raised to overweight at Barclays; PT 5.45 Pounds
  • Unilever upgraded to buy at Goldman; PT 62 Euros

DOWNGRADES:

  • LondonMetric cut to underweight at Morgan Stanley; PT 2 Pounds
  • Nanogate downgraded to hold at Berenberg

INITIATIONS:

  • Autogrill resumed at citi with Neutral

MARKETS:

  • MSCI Asia Pacific up 1.4%, Nikkei 225 down 0.3%
  • S&P 500 up 0.1%, Dow up 0.2%, Nasdaq down 0.1%
  • Euro up 0.05% at $1.0988
  • Dollar Index down 0.08% at 98.84
  • Yen up 0.07% at 106.21
  • Brent down 0.5% at $59/bbl, WTI down 0.1% to $55.1/bbl
  • LME 3m Copper up 0.1% at $5682.5/MT
  • Gold spot up 0.3% at $1524.3/oz
  • US 10Yr yield little changed at 1.5%

ECONOMIC DATA (All times CET):

  • 9:15am: (SP) Aug. Markit Spain Manufacturing PMI, est. 48.5, prior 48.2
  • 9:45am: (IT) Aug. Markit Italy Manufacturing PMI, est. 48.5, prior 48.5
  • 9:50am: (FR) Aug. Markit France Manufacturing PMI, est. 51, prior 51
  • 9:55am: (GE) Aug. Markit/BME Germany Manufacturing PMI, est. 43.6, prior 43.6
  • 10am: (EC) Aug. Markit Eurozone Manufacturing PMI, est. 47, prior 47
  • 10:30am: (UK) Aug. Markit UK PMI Manufacturing SA, est. 48.4, prior 48
  • 6pm: (IT) Aug. New Car Registrations YoY, prior -0.1%

To contact the reporters on this story: Michael Msika in London at mmsika4@bloomberg.net;Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net

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

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