LIVE MARKETS-"Brakes-It": how hard would a no-deal Brexit hit autos?

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LIVE MARKETS-"Brakes-It": how hard would a no-deal Brexit hit autos?
Credit: © Reuters.

* European shares fall

* Autos stocks tumble after Osram warning, UBS downgrades

* UK retailers in focus as Christmas updates land

Jan 10 - Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Helen Reid. Reach her on Messenger to share your thoughts on market moves: rm://


With so much bad news around the autos sector today - Jaguar Land Rover's job cuts, Osram Licht's warning on slower autos growth, UBS downgrading Faurecia and Continental for the same reasons - it's no wonder investors are rushing out of the stocks which already had a terrible 2018. timing then for a bit of analysis on what could make the situation even worse for carmakers in the UK and Europe: a no-deal Brexit.

Morningstar argues - in a note titled "Brakes-It" - that Britain's auto industry is highly integrated with the EU, with ties especially strong between the UK and Germany, and any disruptive no-deal outcome would impact the whole region.

In a no-deal Brexit scenario auto sector fair values would fall on average by 12 percent, Richard Hilgert, senior equity analyst at Morningstar, estimates.

Morningstar's base case forecast is for flat demand for the major European markets in the coming years, but a no-deal Brexit scenario would result in recessionary light-vehicle demand, as you can see below.

However, amid the potential chaos Hilgert reckons "Valuations for select stocks look attractive", pointing to BMW BMWG.DE as significantly undervalued.

"The market has overly discounted the shares on trade conflict, declining EU demand for diesel powertrain, margin contraction on higher spending for industry-disruptive technologies, and a European Commission investigation into diesel equipment collusion among German automakers," he writes.

Spot the difference:

(Helen Reid)



The CAC 40 is underperforming its European peers this afternoon, down 0.6 percent against 0.19 percent for the STOXX.

While Paris had a better 2018 than most European bourses, it is now a clear laggard of early 2019, growing at half the speed as other benchmarks, year-to-date.

The question is, have the "yellow vests" protests put an end to the Macron trade and killed its mojo?

Well the impact of the weak macro data published this morning seems to be providing an answer. CAC was hit by a slowdown in French industrial production which has unexpectedly declined 1.3% in November," wrote Fiona Cincotta of City Index.

Longer run, pundits commenting on the data this morning all seem to believe the riots are inflicting more than a superficial wound to the Gallic economy.

"With any hopes of a second-semester rebound now gone, we now expect industrial production to grow by a mere 0.5% in 2018," ING writes.

Barclays (LON: BARC ) revised its Q4 GDP forecast down to 0.1 percent from 0.2 percent and said it does not rule out "a flat print".

Oxford Economics made the point that the "protests made a larger than anticipated damage to the French economy" which clouds the outlook for Q1 as the crisis goes on.

Much of the bet on the French stock market has been based on the view that France could play catch-up with Germany, once structural reforms implemented by Macron kick in.

Looking at industrial production, which was today's focus, there's indeed a lot of catching up to do, as you can see below in this BNP Paribas (PA: BNPP ) chart.

If the CAC 40 is a gauge of the market's faith in France being able to do so, it doesn't look good.

(Julien Ponthus)



Times are highly uncertain and not only on Brexit and many of the winners that drove the long bull market, which stumbled last year on a mix of political and economic worries, have rapidly turned out of favour, even in the UK mid-caps space.

But there's an antidote: diversify, diversify, diversify, according to Robert Chantry, UK mid-cap analyst at Berenberg.

"Given the particularly wide range of potential macro and political scenarios that could play out over the next two years, at the start of 2019 we map out a range of potential outcomes and conclude that this year is one to diversify across several strategies and styles, covering several bases," says Chantry.

In this exercise, he doesn't rule out even investing in the unloved Brexit basket, where stocks are so cheap and could get a boost in a relatively benign scenario for Britain.

Stocks with more than 35 percent of their EBIT coming from outside the UK have outperformed their more domestically-orientated peers by around 70 percent.

"We continue to believe this underperformance has created opportunities in sectors such as the housebuilders, building products and certain consumer names where fundamentals are holding up, but also acknowledge the quite specific sentiment risk on a political outcome," he says, pointing to Cranswick CWK.L , Dalata DHG.I and Bellway BWY.L as his top three names.

But don't forget to diversify. Where?

Chantry singles out some higher-growth stocks that have gone quickly out of favour in the recent market rout (Alpha FMC AFM.L , Ascential ASCL.L and GB Group GBGP.L ), a group of special situations where sentiment could improve (Cineworld CINE.L , Burford BURF.L and Gocompare GOCO.L ), and finally some of the heavily de-rated cyclical names (RHI Magnesita RHIM.VI , DiscoverIE DSCV.L and Morgan Advanced Materials MGAMM.L ).

(Danilo Masoni)



Just as new-found belief in the bull market is starting to spread among investors, you can count on SocGen's permabear to pour cold water over hopes fuelled by buoyant U.S. jobs and a steepened yield curve.

"Traditionally the yield curve steepens as the Fed eases immediately prior to a recession," Albert Edwards wrote in his latest report, in which he also makes the point that higher than expected US non-farm payrolls don't rule out bad times ahead.

"Market confidence that the strong December payroll data means a recession cannot be imminent is equally misplaced," the strategist warns.

"Just ahead of the last recession that started in December 2007, payrolls popped sharply higher in October, and exactly the same thing occurred before the previous recession began in March 2001."

So what should you be looking at? Well, Edwards believes technical analysis is key and that "a collapse in the markets will precede a recession, just as it did in 2007".

Bullish investors can however take some comfort in the fact that SocGen's permabear's views are far from being consensual and that other strategists see a different future unfolding.

Goldman Sachs (NYSE: GS ) economic research for instance points to a possible "risk rally" if global growth proves less disappointing than that priced in the market.

Do note that if GS analysts believe a "bear-market bounce" would likely deliver most of this year's equity returns, they take the view that after that "stocks will trade in a relatively flat and narrow range".

Here's Edwards' graph on NFPs and recessions:

(Julien Ponthus)



Luxury outlooks aren't as shiny as they used to be. Analysts at UBS and Berenberg have slashed their expectations for Europe's luxury stocks in anticipation of slower growth as trade tensions and sluggish China growth hurt consumers' willingness to splash out on expensive items.

"There is undoubtedly more downside than upside risk to organic growth estimates for the luxury stocks," writes Berenberg in a gloomy note.

UBS has cut its global estimate for luxury spending growth from 13 percent in 2018 to 7 percent in 2019, with a main culprit the Chinese slowdown.

"There are continued risks for Chinese luxury consumption from slower GDP growth, the waning wealth effect from property and the weaker Renminbi ," writes UBS' luxury team led by Helen Brand.

"We believe the weaker RMB, crackdown on daigou at the borders, and new e-commerce law will continue to dampen Chinese overseas luxury spending in 2019," they add (Daigou is the practice of overseas surrogate shoppers buying goods for customers in mainland China).

As you can see below, spending in China is only a third of total luxury spend so that overseas spending is crucial.

Though the China issues have already been well documented, UBS also highlights stock market volatility could hurt luxury spending in the U.S.. Brand and team see U.S. luxury spending growth of around 5 percent in 2019 versus 15 percent in 2018.

However, UBS' evidence lab survey does find that there's still appetite among Chinese consumers for spending on luxury items, as you can see below.

In terms of stocks, UBS downgrades luxury sector darling and Gucci owner Kering (PA: PRTP ) to neutral, a big move for a stock that's rated a buy by 20 of the 23 analysts covering it.

Berenberg luxury analysts also downgrade Burberry (from buy to hold), Prada (from buy to hold) and Tod's (from hold to sell), saying "we turn more defensive about the turnaround stories due to their relatively elevated multiples".

(Helen Reid)



Next Tuesday we'll know whether Germany has avoided a technical recession and while concerns over a global slowdown were indeed corroborated by a string of poor data, markets may have gone a bit ahead of themselves.

HSBC in fact says it is still constructive on Europe's growth prospects despite forecasting eurozone GDP to slow to 1.4 pct growth in 2019 and 1.3 pct in 2020 from 1.9 pct in 2018.

"The divergence between reasonably solid economic data and weak capital markets suggests there could be opportunities," says Joerg-Andre Finke, head of equity research Germany at HSBC.

"Supporting factors include rising wage growth and employment as well as a lower oil price. The global picture too does not look too bad, with strong U.S. data (eg U.S. consumer confidence at an 18-year high in October) and stimulus likely in China," he adds.

Finke notes that the DAX and the MDAX indexes are both trading at a discount to their ten-year PE average for the first time in several years, indicating some valuation upside.

That being said, he has taken a look at German mid-caps scanning for firms with ongoing strength in sales and earnings, along with attractive valuations and visible catalysts.

Here are his 6 top picks which he says offer an implied upside of 35 pct: Adler Real Estate ADLG.DE , Fuchs Petrolub FPEG_p.DE , Grenke GLJn.DE , KION KGX.DE , Krones KRNG.DE and Puma PUMG.DE .

(Danilo Masoni)



A lack of concrete news from the U.S.-China trade talks have stalled the European stock rally this morning, hitting the autos and luxury goods stocks, which are exposed to health of the world's second-largest economy, hardest.

Frankfurt, whose auto and industrial giants are also vulnerable to China trade frictions, and Paris are falling the most, down 0.8 percent and 1 percent respectively. Germany's Osram Licht has fallen sharply after its CEO cautioned that slowing autos demand would lead to weaker-than-expected Q4 results, dragging Valeo (PA: VLOF ), Faurecia and other car suppliers with it.

The retail sector continues to capture the headlines with the UK high street staples - Halford, DFS Furniture, M&S and Tesco (LON: TSCO ) - issuing Christmas trading statements. Tesco's been crowned king of holidays, up 2.3 percent and top FTSE 100 gainer while Halfords has plunged to multi-year lows after its downbeat assessment.

French electronics and household appliance chain Fnac Darty gave a glimpse into impact of the 'yellow vest' protests with a warning it will take a 45 million euro hit on revenue.

(Josephine Mason)



Some European bourses may be on shaky ground technically after their impressive run higher since the start of the year.

Hard to believe given the FTSE 100 hit its lowest since July 2016 just two weeks ago, but the UK blue chip index closed yesterday with a relative strength index (RSI) reading of 55.5, its highest since end-September.

That's just shy of 60, which would push the index into oversold territory on a technical basis for the first time since last May when the bourse hit all-time highs.

It's similar with the STOXX 600 whose RSI is just under 54, its highest since November.

(Josephine Mason)



A two-day rally taking European stocks to three-week highs was set to fizzle out on Thursday with futures pointing to a weaker open after U.S. and Chinese statements following trade talks in Beijing failed to deliver sufficient practical details.

Results took centre stage with UK retailers in focus after Christmas trading figures from Marks & Spencer, Tesco, and Debenhams, while on the continent disappointments from Germany's Suedzucker and France's Sodexo and Fnac Darty were likely to weigh on those shares.

Marks & Spencer's Christmas trading figures were weaker than expected with falling underlying sales in both clothing and food. Its shares were indicated down 2 percent. Tesco outperformed with a 2.2 percent rise in Christmas sales – driving its shares up 2 percent in pre-market – while B&M saw sales rise 12.1 percent in its third quarter. Debenhams, meanwhile, said Christmas trading was weak and it was in talks with lenders, looking to bring new sources of funding into the business.

Reports of outflows and falling assets under management from asset managers Jupiter and Rathbone Brothers underlined the challenging market environment money managers are having to navigate.

While it's owned by Tata Motors (NS: TAMO ) and not listed in the UK, Britain's biggest carmaker Jaguar Land Rover offered a concerning insight into the environment for auto companies: a source tells Reuters it's set to announced "substantial" job cuts in the thousands as it faces double-digit drops in demand in China and a slump in sales for diesel in Europe.

Premier Oil cuts more debt than forecast Land Rover to make "substantial" job cuts after China, diesel slump- source clothing and food sales fall in Christmas quarter looking for fresh funding, Christmas trading weak retailer B&M's quarterly sales rise reports $1.9 billion Q4 outflows, tough markets trim AUM Brothers Q4 investment management assets down 6.8 pct firm Mitchells & Butlers holiday sales rise 9.8 pct outperforms market with 2.2 pct rise in Christmas sales of Georgia names Archil Gachechiladze CEO Robert Walters reports 13 pct rise in quarterly fee income service firm Takeaway says quarterly orders rise 55 pct Reid)



European futures are down 0.5 to 0.6 percent across the major benchmarks after Asian shares checked their rally overnight too. The statement from China after trade talks in Beijing left something to be desired in terms of practical details.

"Overnight the Chinese Commerce Ministry said talks were 'extensive...deep...detailed' but other reports suggest the talks got bogged down when issues cut across Chinese national security and/or Chinese subsidies to state companies," writes Chris Bailey, analyst at Raymond (NS: RYMD ) James.

(Helen Reid)



There's more results coming in today ahead of the fourth-quarter earnings season kicking off in earnest. Suedzucker's shares are down 3.8 percent in pre-market trade after it reported a quarterly operating loss due to low sugar prices. Catering group Sodexo is also not looking so good after warning investments will eat into its first half margin.

To come in the flurry of UK results at 0700 will be the all-important Christmas trading figures from retailers Marks & Spencer and Tesco.

Outside results news, Fiat Chrysler could be hurt by our sources-based report that the carmaker will pay more than $700 million to resolve lawsuits from the U.S. Justice Department and diesel owners over claims it used illegal software to allow 104,000 of its vehicles to emit excess emissions.

Suedzucker posts quarterly operating loss on low sugar prices group Sodexo cautions investments will weigh on H1 margin Chrysler to pay more than $700 mln over U.S. diesel emissions claims -sources Thailand unit to pay nearly $300 mln in legal disputes sues insurer Zurich over $100 mln cyber attack claim - FT Reid)



After a strong two-day rally taking the market to three-week highs, European shares are seen faltering at the open with spreadbetters indicating the main indices down 5 to 12 points. A notable lack of detail in the U.S. and China's statements after this week's trade talks could be to blame.

Trade talks between China and the United States this week were extensive, and helped establish a foundation for the resolution of each others' concerns, China's commerce ministry said on Thursday, but gave no details on the issues at stake. shares edged up overnight as stimulus expectations and a rise in the yuan helped Chinese equities erase early losses, while markets awaited more news on U.S.-China trade talks amid hopes that an all-out trade war can be averted. spreadbetters at IG expect London's FTSE to open 12 points lower at 6,895, Frankfurt's DAX to open 5 points lower at 10,889 and Paris' CAC to open 6 points lower at 4,807.

(Helen Reid)


<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ BLOG HEADSHOT FUTURES JAN 10 Oversold on RSI? Indices MDAX PE UBS Jan 10 Chinese luxury spending JAN 10 UBS evidence lab china survey zert Brexit stocks qsdf Jan 10 Morningstar Autos 1 Morningstar Jan 10 no deal autos


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