(HSBC) Back to bull market in luxury?

Back to bull market in luxury?

* Feedback during weeks of marketing highlights that many investors still wonder why luxury demand is rebounding
* Tug of war between valuation and momentum being won by the latter; we still see some challenges
* Short term, deals are in focus

Luxury demand is back. Weeks after our September 2016 luxury thematic report
(Panda-monium: How Chinese travellers are transforming consumption, 6 September
2016), our view that luxury demand would rebound has been validated. Many of the
psychological catalysts which dampened luxury demand – starting with the RMB
deterioration in August 2015 and including attacks in Paris in November 2015 – have
now been shrugged off. Every market, with the possible exception of Japan, is doing
better or in line with previous trends. After the US election and once we pass the oneyear
mark after the Paris attacks, these trends could get even better. Until the recent
concerns on curbs to travel, Chinese tourism to Korea was booming. Also, Hong Kong
luxury sales have seen an acceleration in the second derivative of growth. Meanwhile,
sales in the UK are strong following the fall in sterling (on price arbitrage), and mainland
China continues to do well.
Stocks rebound on news or on hope. Given threats to travel and geopolitical issues,
luxury stocks had been shorted by hedge funds and largely ignored by long only
institutions for many months. With LVMH, the bellwether, recently beating estimates and
Gucci and Saint Laurent within Kering posting strong growth, stock prices have been
quick to move higher across the board. Reversion to mean stories such as Prada and
Hugo Boss have benefited, while watch-driven companies Richemont and Swatch have
also seen strong performance on hopes of a recovery after inventory de-stocking. As we
highlighted in our Panda-monium thematic, however, we see challenges facing the watch
sector including price cuts and high inventories.
Investors asking about a wave of consolidation. When asked “what brands will be
taken out” we point out that many of the higher quality assets in luxury are familycontrolled
and profitable (e.g. Chanel, Patek Philippe, Audemars Piguet, Chopard,
Armani). We noticed increased interest in this theme following LVMH’s recent acquisition
of German luggage brand Rimowa. Note that the size of the deal is not significant, and,
as discussed in our recent Samsonite update, reflects our bullishness on travel being a
decades-long investment theme ahead. There were reports that Coach may take over
Burberry (Bloomberg on 21 October 2016) but we would caution that M&A in luxury
usually generates very limited synergies and that companies tend to buy small to grow.

>>> Pioneer: Aberdeen may join Poste Italiane consortium

Pioneer: Aberdeen may join Poste Italiane consortium – report (translated)
01 NOV 2016
Aberdeen, the UK asset management company bidding for Pioneer, the asset management unit of Unicredit, the listed Italian financial services group, could join an Italian consortium led by Poste Italiane, Italian language language daily Il Messaggeroreported. The unsourced report said that if the alliance with Poste Italiane goes ahead, Pioneer would be broken up, with Aberdeen taking over Pioneer's US assets.
The report added that the deadline for binding offers is 10 November.
The other members of the Poste Italiane consortium are listed Italian asset management group Anima and CdP, the holding of the Italian Treasury
As previously reported, Pioneer could sell for as much as EUR 4bn.

>>> Mediaset to remain under control of Berlusconi family

Mediaset to remain under control of Berlusconi family (translated)
01 NOV 2016
Mediaset, the listed Italian media group, is to remain under the control of the Berlusconi family, Italian language daily Milano Finanza reported.
The report cited former Prime Minister Silvio Berlusconi as categorically ruling out Mediaset having another controlling shareholder.
The item cited Berlusconi as noting that the family was thinking of increasing its stake in Mediaset.
Mediaset has a market cap of EUR 3.07bn.

Sony misses by JPY10.05, misses on revs; reaffirms FY17 revs guidance (31.33)

Sony misses by JPY10.05, misses on revs; reaffirms FY17 revs guidance
  • Reports Q2 (Sep) earnings of JPY3.84 per share, JPY10.05 worse than the Capital IQ Consensus of JPY13.89; revenues fell 10.8% year/year to JPY1688.9 bln vs the JPY1770.77 bln Capital IQ Consensus.
    • This decrease in revs was mainly due to the impact of foreign exchange rates. On a constant currency basis, sales were essentially flat year-on-year, due to a
      decrease in Mobile Communications segment sales reflecting a significant decrease in smartphone unit sales, substantially offset by an increase in revenues in the Financial Services segment due to an improvement in investment performance in the separate account at Sony Life Insurance Co, as well as an increase in sales in the Pictures segment.
  • Co reaffirms guidance for FY17, sees FY17 revs of JPY7.4 trln vs. JPY7630.55 bln Capital IQ Consensus Estimate.
    • Recall, co lowered its FY17 forecast yesterday
    • Related to the planned transfer of its battery business, Sony expects to record an impairment charge of ~JPY33.0 billion as an operating loss in the Components segment and JPY4.5 bln is expected to be recorded in income taxes during the fiscal year ending March 31, 2017 (April 1, 2016 to March 31, 2017). As a result, a loss of ~JPY37.5 billion is expected to be recorded in net income attributable to Sony Corporation's shareholders for the fiscal year ending March 31, 2017.
    • Co lowered FY17 net income of JPY60 bln, down from JPY80 bln prior (per yesterday's release)

>>> What to look at today - 1st of November 2016

Dow-0.10% S&P-0.01% Nasdaq-0.02% Russell +0.32%
US Market Closed on a flat note. Nasdaq Composite was little changed, ending October down 2.3%. Meanwhile, the S&P 500 also settled flat, finishing the month lower by 1.9%. Another wave of M&A helped the market at the open (CTL/LVLT), GE/BHI. WTI crude settled lower by 3.9% ($46.84/bbl; -$1.88), finishing October down 2.6%. Fed funds futures were little changed by the data with the December meeting still commanding an outsized number of rate hike bets. According to the CME's FedWatch Tool, the implied probability of a December hike is 77.8%. Nine sectors ended in positive territory with utilities (+2.0%), real estate (+1.4%), and industrials (+0.2%) outperforming. Conversely, energy (-1.2%) and health care (-0.6%) finished in the red. Volume were above average with more than 1bil shares traded. US After Hours RYAM +11%, CGNX +8%, AMKR +6% following earnings/guidance, OCLS +70% on asset sale news... INST -18.5%, NLS -9.9%, RAIL -9.1%, THC -8.7%, TEX -5.8%, LB -5.6% following earnings/guidance. As widely expected BOJ leaves policy settings and framework after shifting to yield curve control last time around; As part of its semiannual outlook for growth and prices, BOJ also maintains its views for GDP in FY16-19 years while cutting all 3 years' CPI by 0.2% pts. China twin PMIs hit multi-month highs - manufacturing for Official and Caixin prints at 2-year highs and non-manufacturing at 10-month high; Official manufacturing PMI components see 2016 highs for New Orders, Output, Employment, and Input prices; Caixin PMI at highest level in over 2 years, as employment culling slowed to lowest pace in 17 months and input price inflation rises by the biggest rate in over 5 years.

Nikkei +0.10% Hang Seng +1.19% CSI +0.68% Shanghai +0.71%

Eur$ 1.0973 CNH 6.7837 CNY 6.7758 JPY 104.93 GBP 1.2229 CHF 0.9886 RUB 63.1902 WTI$ 47.06 +0.43%

S&P +0.40% EuroStoxx +0.52% FTSE +0.31% Dax +0.41% SMI +0.24%

Macro :
- China Oct. Manufacturing PMI 51.2; Est. 50.3
- Carney to Stay On as BOE Governor for Extra Year to June 2019

Keep an eye on :
- AIR FP : China to Need 6,000 New Planes Over 20 Years, Airbus Says
- AKA NO : Akastor 3Q Revenue Falls; Net Loss Narrows
- CS FP : Dutch MP Proposes Revised EU Deposit Insurance: Boersen-Zeitung
- BP/ LN : BP 3Q Adjusted Net Beats; Div. 10c/Share Matches Forecast
- CNA LN : Centrica Says Rough Withdrawal Restart Delayed to Late November
- GS US : Goldman Sachs Said to Outsource Dark Pool Operations to Nasdaq
- NRE1V FH : Nokian Renkaat 3Q Profit, Sales Slightly Below Estimates
- NOVN VX : Novartis Gets FDA Priority Review for LEE011 in Breast Cancer
- ORK NO : Orkla 3Q Adj. Ebit Beats Est. Amid Branded Consumer Goods Growth
- PNDORA DC : Pandora 3Q Net Beats Estimates, Raises Ebitda Margin Forecast
- PFV GY : Pfeiffer Vacuum 3Q Sales, Ebit Little Changed, Miss Estimates
- RDSA NA : Shell 3Q CCS Adj. Net $2.79b vs Est. $1.79b; Div. 47c/Share
- ROG VX : Roche Appoints Christiane Hamacher Head of Asia-Pacific Business
- RR/ LN : Rolls-Royce Bribe Probe Reviews Agents in 12 Nations: Guardian
- SYNN VX : ChemChina Extends Public Tender Offer for Syngenta Until Jan. 5
- VASTN NA : Vastned Sees 2016 Direct Result Per Share at Upper End of Range
- WEIR LN : Weir FY Profit to be Slightly Lower Than Market Expectations

>>> Europe : Brokers Upgrades & DOwngrades - 1st of November 2016

>>> Up
*Big Yellow Group Raised to Buy at Liberum
*Kuehne Raised to Neutral at JPMorgan, PT CHF143
*Land Securities Raised to Hold at Liberum
*Novozymes Raised to Hold at Berenberg
*WPP Raised to Buy at HSBC

>>> Down
*Amec Foster Wheeler Cut to Equal Weight at Barclays, PT 500p
*KGHM Cut to Underweight at Morgan Stanley
*Segro Cut to Hold at Liberum
*Shaftesbury Cut to Hold at Liberum
*WM Morrison Cut to Hold at Jefferies, PT 225p

>>> PT Change


>>> Initiation
*Berkeley Energia Rated New Buy at Peel Hunt, PT 93p
*Ladbrokes Coral Rated New Overweight at Morgan Stanley, PT 190p

>>> Call
>> Stock
*CONTINENTAL ADDED TO ALPHA LIST AT BANKHAUS LAMPE
*FIELMANN EXITS ALPHA LIST AT BANKHAUS LAMPE

>>> Asian Update

Asia Mid-Session Market Update: China PMIs hit multi-month highs; BOJ on hold with a cut to CPI forecasts; RBA stands pat with more hawkish outlook

***US Session Highlights***
- OPEC Sec Gen Barkindo: OPEC committee made 'significant progress'; remains on track for deal on Nov 30th
- (US) SEPT PERSONAL INCOME: 0.3% V 0.4%E; PERSONAL SPENDING: 0.5% V 0.4%E
- (US) SEPT PCE CORE M/M: 0.1% V 0.1%E; Y/Y: 1.7% V 1.7%E
- (US) SEPT PCE DEFLATOR M/M: 0.2% V 0.2%E; Y/Y: 1.4% V 1.2%E
- (US) OCT CHICAGO PURCHASING MANAGER: 50.6 V 54.0E; prices paid highest since Nov 2014
- (US) OCT DALLAS FED MANUFACTURING ACTIVITY: -1.5 V +2.0E (though company outlook remains positive)
- Merger Monday: Baker Hughes/GE, Level3/CenturyLink, Team Health

***US markets on close: Dow -0.1%, S&P500 flat, Nasdaq flat***
- Best Sector in S&P500: Utilities
- Worst Sector in S&P500: Basic Materials
- Biggest gainers: DVA +6.3%, L +4.9%, NEM +4.7%, LVLT +3.9%, ESRX +3.6%
- Biggest losers: ZBH -14.0%, CTL -12.5%, JCI -7.9%, BHI -6.3%, RIG -5.9%
- At the close: VIX 17.1 (+0.9pts); Treasuries: 2-yr 0.85% (flat), 10-yr 1.84% (flat), 30-yr 2.59% (-3bps)

***US movers afterhours***
- RYAM: Reports Q3 $0.44 v $0.27e, R$207M v $211Me; +10.6% afterhours
- CGNX: Reports Q3 $0.61 v $0.48e, R$148M v $146Me; +8.0% afterhours
- LMNX: Reports Q3 $0.21 v $0.12e, R$71.2M v $69.2Me; +3.3% afterhours
- LION: To be added to S&P600 index after the close of trading on Nov 2; +2.4% afterhours
- LB: Narrows Q3 $0.40 v $0.45e (prior $0.40-0.45), guides Oct SS +1%; -5.9% afterhours
- TEX: Reports Q3 $0.19 v $0.22e, R$1.06B v $1.05Be; -7.9% afterhours
- THC: Reports Q3 $0.16 v $0.19e, R$4.8B v $4.75Be; -8.1% afterhours

***Asia Session Notable Observations, Speakers and Press***
- As widely expected BOJ leaves policy settings and framework after shifting to yield curve control last time around; As part of its semiannual outlook for growth and prices, BOJ also maintains its views for GDP in FY16-19 years while cutting all 3 years' CPI by 0.2% pts. BOJ affirmed its assessment for the overall economy, exports, housing, and business investment, but noted its inflation expectations remained in weakening phase as it shifted its forecast for achieving 2% inflation target by another half a year to H2 of FY18.
- China twin PMIs hit multi-month highs - manufacturing for Official and Caixin prints at 2-year highs and non-manufacturing at 10-month high; Official manufacturing PMI components see 2016 highs for New Orders, Output, Employment, and Input prices; Caixin PMI at highest level in over 2 years, as employment culling slowed to lowest pace in 17 months and input price inflation rises by the biggest rate in over 5 years.
- AUD/USD rises over 40pips above 0.7650 and Australia 3-year bond yield up 3bps after a decidedly neutral RBA policy statement. While the RBA largely reiterated prior month's policy statement in the 2nd decision for Gov Lowe, it did add more bullish passages in terms of China growth as well as on inflation outlook. RBA upgraded its China view to "steadied recently" from "moderating", and also added that "inflation is expected to pick up gradually over next 2 years".

***Asia Key economic data:***
- (CN) CHINA OCT CAIXIN PMI MANUFACTURING: 51.2 V 50.1E; 4th consecutive expansion; highest since July 2014
- (CN) CHINA OCT MANUFACTURING PMI (GOVT OFFICIAL): 51.2 V 50.3E; 3rd straight expansion (2-year high); Non-manufacturing PMI (Services): 54.0 v 53.7 prior; 10-month high
- (JP) JAPAN OCT FINAL PMI MANUFACTURING: 51.4 V 51.7 PRELIM
- (KR) SOUTH KOREA OCT PMI MANUFACTURING: 48.0 V 47.6 PRIOR; 3rd straight contraction
- (KR) SOUTH KOREA OCT TRADE BALANCE: $7.2B V $7.2BE; Exports Y/Y: -3.2% v -3.1%e; Imports Y/Y: -5.4% v -4.4%e
- (KR) SOUTH KOREA OCT CPI M/M: +0.1% V -0.1%E; Y/Y: 1.3% V 1.1%E; CPI CORE Y/Y:1.5 % V 1.2%E
- (AU) AUSTRALIA OCT CORELOGIC RPDATA HOUSE PRICES M/M: 0.5% V 1.0% PRIOR
- (AU) AUSTRALIA OCT AIG MANUFACTURING INDEX: 50.9 V 49.8 PRIOR; 1st expansion in 3 months
- (NZ) NEW ZEALAND OCT QV HOUSE PRICES Y/Y: 12.7% V 14.3% PRIOR (7th straight increase; smallest rise in 5 months)

***Asian Equity Markets (00:00ET)***
- Nikkei flat, Hang Seng +1.1%, Shanghai Composite +0.3%, ASX200 -0.8%, Kospi -0.2%

***FX ranges/Commodities/Futures/Fixed Income (00:00ET):***
- EUR 1.0960-1.0980; JPY 104.65-104.95; AUD 0.7600-0.7680; NZD 0.7145-0.7175
- Dec Gold +0.4% at 1,278/oz; Dec Crude Oil +0.1% at $46.90/brl; Copper +0.1% at $2.21/lb
- Equity Futures: S&P e-mini +0.4%, Dax +0.3%, FTSE100 +0.2%
- USD/CNY: (CN) PBOC SETS YUAN MID POINT AT 6.7734 V 6.7641 PRIOR
- (CN) PBOC to inject CNY100B in 7-day reverse repos, CNY60B in 14-day reverse repos, and CNY30B in 28-day reverse repos
- (KR) South Korea sells 30-yr bonds at 1.805%

***Asia movers***
- Consumer discretionary: SK Networks 001740.KR +2.3% (Q3 result); Vita Group VTG.AU -8.8% (in talks with Telstra); Nine Entertainment NEC.AU +2.9% (Allan Gray Australia boosts stake); Kirin Holdings Co 2503.JP +2.5% (9-month result); Japan Tobacco Inc 2914.JP +0.9% (9-month result); Panasonic Corporation 6752.JP -6.8% (H1 result)
- Consumer staples: COFCO Meat Holdings 1610.HK -15.5% (IPO debut)
- Financials: Macquarie Group MQG.AU -1.1% (Credit Suisse cuts to neutral); Huishang Bank 3698.HK +2.4% (approval to issue shares)
- Industrials: Nippon Express 9062.JP +1.9% (H1 result); Mitsubishi Heavy Industries 7011.JP -0.9% (H1 result); Fanuc 6954.JP -4.7% (Q2 result)
- Technology: NEC Corp 6701.JP +1.8% (H1 result)
- Materials: Newmont Mining NEM.AU +4.7%(Mackie Research Capital raised to buy); Fortescue Metals Group FMG.AU -0.5% (Credit Suisse cuts to underperform); Honda Motor Co.7267.JP -1.5% (H1 result)
- Energy: AWE AWE.AU +2.8% (Macquarie raised to Neutral); China Shenhua Energy Co 1088.HK +7.1% (completes capacity cut target)
- Utilities: Mitsubishi Electric Corp 6503.JP +2.4% (H1 result)

>>> US After Hours Summary: RYAM +11%, CGNX +8%, AMKR +6% following ea


After Hours Summary: RYAM +11%, CGNX +8%, AMKR +6% following earnings/guidance, OCLS +70% on asset sale news... INST -18.5%, NLS -9.9%, RAIL -9.1%, THC -8.7%, TEX -5.8%, LB -5.6% following earnings/guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: RYAM +10.6%, CGNX +7.8%, AMKR +6.3%, AEIS +3.7% (ticking higher), LMNX +3.3%, ORC +2.6%, IDTI +2.1%

Companies trading higher in after hours in reaction to news: OCLS +70% (sells its Latin American-related assets to Invekra S.A.P.I. de C.V. of Mexico for $19.5 mln in cash), DRYS +25.8% (sold five of its Panamax vessels for an aggregate gross price of $29.4 million), LION +2.4% (ticking higher - Fidelity Southern will replace Monster Worldwide in the S&P SmallCap 600 after the close of trading on November 2), DLNG +2% (Dynagas LNG Partners enters charter agreement with Gazprom Marketing & Trading Singapore for the employment of the 150k cubic meter steam turbine LNG carrier Clean Energy), BBRY +1.6% (BlackBerry signs agreement with Ford Motor Company for expanded use of BlackBerry's QNX and Security Software), VRX +1% (following late sell-off on reports that former exec might be under criminal investigation; co confirms has been fully cooperating with authorities throughout the investigation and in frequent contact/continue to cooperate with US Attorney's Office for the Southern District of New York), CBR +1% (light volume- Board has engaged a strategic adviser to assist in exploring strategic alternatives)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: INST -18.5%, NLS -9.9%, RAIL -9.1%, THC -8.7%, STRL -7.3%, TEX -5.8%, LB -5.6%, (lowers Q3 EPS guidance ahead of its Investor Update Meeting; sees October same store sales +1% vs +LSD growth guidance), MPWR -2.9% (ticking lower), APC -2.4%, DKL -2.4%, OFIX -1.8%

Companies trading lower in after hours in reaction to news: EFC -2.3% (ticking lower, announces third quarter dividend of $0.45 per share, down from prior $0.50/share), M -0.3% (sells five stores to General Growth Properties)

>>> US Close Dow-0.10% S&P-0.01% Nasdaq-0.02% Russell +0.32%


Closing Market Summary: Averages End Flat, Locking in Monthly Losses

The major averages finished the month on a flat note, settling with monthly losses across the board. Participants preferred a cautious approach at the beginning of the week as a glut of earnings reports and economic data remained in sight. The Nasdaq Composite was little changed, ending October down 2.3%. Meanwhile, the S&P 500 also settled flat, finishing the month lower by 1.9%.

Equity indices briefly rose at the start of the session as a recent wave of M&A chatter culminated in some weekend deals. CenturyLink (CTL 26.58, -3.81, -12.5%) agreed to acquire Level 3 (LVLT 56.15, +2.10, +3.9%), offering $66.50 per share, or approximately $25 billion. Meanwhile, General Electric (GE 29.10, -0.12, -0.4%) reached a deal to combine its oil and gas business with Baker Hughes (BHI 55.40, -3.72, -6.3%).

The upbeat start proved to be short-lived, however, as an extended downturn in crude oil futures drove the broader market back to its flat line. The energy component was under pressure after members of OPEC failed to solidify a proposed supply freeze agreement. The oil collective held a technical meeting over the weekend, but could not cement individual production cut allocations. WTI crude settled lower by 3.9% ($46.84/bbl; -$1.88), finishing October down 2.6%. 

The broader market attempted to shrug off the move in crude oil as a pullback in bond yields and largely in-line economic data offered support. 

The latest inflation reading fell largely in-line with expectations as personal income rose 0.3% (consensus +0.4%) in September while personal spending increased 0.5% (consensus +0.5%). The Core PCE Price Index ticked higher by 0.1% (consensus +0.1%), pushing year-over-year growth to 1.7%. This is the last inflation reading ahead of the Fed's November policy meeting this Wednesday. 

Fed funds futures were little changed by the data with the December meeting still commanding an outsized number of rate hike bets. According to the CME's FedWatch Tool, the implied probability of a December hike is 77.8%.  

Nine sectors ended in positive territory with utilities (+2.0%), real estate (+1.4%), and industrials (+0.2%) outperforming. Conversely, energy (-1.2%) and health care (-0.6%) finished in the red.

In the energy sector (-1.2%), Dow component Exxon Mobil (XOM 83.32, -1.46) ended lower by 1.7% after being removed from the "Conviction Buy List" at Goldman. However, fellow Dow component Chevron (CVX 104.75, +0.93) gained 0.9% after Goldman upgraded it to "Buy" from "Neutral" and added it to its "Conviction Buy List." The broader sector finished the month down 3.0%, ending behind the benchmark index. 

Biotechnology extended its recent loss as the iShares Nasdaq Biotechnology ETF (IBB 256.68, -3.81, -1.5%) ended the month lower by 11.3%. This compares to a decline of 6.6% in the broader health care sector (-0.6%). The sub-industry was under pressure as participants weighed the regulatory implications of this election cycle. On that note, McKesson (MCK 127.17, +3.06) rebounded 2.5% after falling 22.7% in the prior session. 

In the industrial sector (+0.2%), Roper (ROP 173.31, +5.40) outperformed after beating bottom-line estimates for the quarter. The stock rallied 3.2% as a bottom-line beat overshadowed some cautious guidance. Dow component General Electric (GE 29.10, -0.12) ended lower by 0.4% after gaining 0.5% at the start of the session.

The Treasury complex settled on a higher note with yields pulling back across the curve. The yield on the 2-yr note slipped one basis point to 0.85% while the yield on the benchmark 10-yr note ended down two basis points (1.83%). The yield on the 10-yr note increased 23 basis points in October. 

Today's trading volume was above the average of 850 million as more than one billion shares changed hands at the NYSE floor.

Economic data included Personal Income, Personal Spending, Core PCE Prices, and Chicago PMI for October: 

  • Personal income increased 0.3% (consensus +0.4%), personal spending increased 0.5% (consensus +0.5%), and the core PCE Price Index was up 0.1% (consensus +0.1%).
    • The Personal Income and Spending report for September was mostly in-line with expectations.
  • The MNI Chicago Business Barometer checked in at 50.6 for October (consensus 54.0), down from 54.2 in September and the lowest reading since May.

Tomorrow's economic data will include the 10:00 ET release of the ISM Index for October (consensus 51.9) and Construction Spending for September (consensus 0.5%). Separately, Auto and Truck Sales for October will be released throughout the day. 

  • Russell 2000: +4.9% YTD
  • Dow Jones: +4.1% YTD
  • S&P 500: +4.0% YTD
  • Nasdaq Composite: +3.6% YTD