--> Don't sell consumer plays because of China concerns, but stay cautious on commodity sectors
* The recent selloff in Chinese A-shares and the consensus downgrades to EM Asia growth projections are prompting many to look for the second order of negative effects. In particular, consumer plays such as Autos and Luxury stocks appear to be fast becoming the “no brainer shorts” in the minds of many.
* Don’t sell consumer plays on China, though. Autos in particular have performed poorly over the past few months, with many bellwether names are down 20% from the highs. In our view, the big picture is one of oil price rolling over, euro weakening and resilient Eurozone PMIs. All these are positives. We note strong Eurozone car registrations in June and improving Cognac sales in Asia. One should be using the dip to re-enter, rather than to sell further, especially if Chinese activity momentum is indeed stabilizing.
--> +ve for RCO
* More broadly, while the Eurozone equities are almost back to the ytd highs, many Cyclical stocks are trading 15% or more off the highs. We think that this is an opportunity. As the bottom chart shows, Cyclicals need to catch up with the bond yields. The DAX P/E discount to the MSCI Europe is at a 20-year high.