- Barcap : European Capital Goods : Mechanicals : Buckle up
What a difference a quarter makes: Ahead of the Q1 earnings season in April, our European mechanicals sector was trading at 19.5x P/E – 15% above prior peaks – with European growth leading indicators accelerating and the sector starting to see green shoots of recovery supported by a period of sustained currency depreciation and lower energy prices (Mechanicals: Irrational exuberance?). A quarter hence and sentiment has reversed, the growth outlook is increasingly uncertain, and the sector has de-rated by 12%. As we look ahead to the earnings season, we think our O&G exposed names look most vulnerable, notably Weir. Atlas Copco and GEA are our preferred names, Alfa Laval and Metso least preferred. Across our wider European Capital Goods sector, we see better value at this point among the electricals – ABB is our Top Pick in the sector – but a further de-rating among the mechanicals should open up a more attractive entry point, in particular on the sector’s short-cycle names such as SKF which are starting to screen more attractive on a relative basis.
- Barcap : European Luxury Goods :Tough H1 priced in bu pockets of value
While we expect a tough Q2 for both sales and margins, we believe this is widely expected and priced in. Since the disappointing Q1 figures, the sector has fallen 9% (4 ppts underperformance vs the market) and we show short interest has picked up significantly. We detail our Q2 forecasts in this note but believe that our full year forecasts remain robust against easier H2 comps and therefore believe the sector offers value at current levels that stand at just a 16% market premium – significantly below the 29% 10-year average. We believe there is value in the sector with the stocks offering opportunities for most investors. In this note we upgrade Hugo Boss to Overweight due to its attractive yield, exposure to domestic Europe and value at 16.8x 2016E PE.
- HSBC - Global Real Estate Compass
In our inaugural edition of the Global Real Estate Compass we cite recent research published by HSBC’s multi-asset group that highlighted HSBC’s non-consensus view on US rate curve steepening. As this prognosis has indeed been taking effect in the US T-bond market over the last quarter it has had understandable ramifications for other bond markets globally, with yield curve steepening widespread.
- HSBC - European Chemicals : All quiet on the chemical front
Back to grey: We are nearing the end of the sector’s recent ‘strong patch’, where the weak EUR and low oil price led to two strong earnings sessions with high double-digit earnings growth. We see a return to normal in H2 – low for longer growth and low capacity utilisation in many products keeping a lid on margins. However, despite this uninspiring medium-term outlook, we also think it would be wrong to be too negative given the recent stream of big M&A deals in the sector, where European companies have predominantly been targets.
Q2 outlook: We expect Q2 to be a relatively dull quarter. Volumes should be up some 2% y-o-y and we expect prices to be down 4% on the lower oil price. The FX tailwind for the sector should be c4% (8% for EUR-based companies). Margins in upstream chemicals have come off their recent highs during the quarter. Overall,
we forecast an 11% y-o-y increase in operating profit, which puts us in line with consensus.