3 Things Under the Radar This Week By

By February 16, 2020 No Comments

© Reuters.

By Peter Nurse and Kim Khan – Attention remained on China and the coronavirus this week as stocks and commodities swung on differing reports of the numbers of new cases.

Among those headlines and another busy week of earnings, investors may have missed a potential opportunity in the luxury sector, with Wall Street expressing confidence in an Italian-French conglomerate.

While Fed chief Jay Powell was on Capitol Hill, there was plenty of other comments from Fed governors.

And looking to commodities, traders may see the effects of a Chinese slowdown all through the end of the year.

Here are three things that flew under the radar this week.

1. The View is Bright at EssilorLuxottica

Turning to the luxury goods sector for investment ideas at this point in time may not sound like clear thinking, but EssilorLuxottica could be the company to turn to for serious upside.

Known for brands such as Ray-Ban, Oakley and Michael Kors, the Italian-French eyewear conglomerate was formed by a merger in late 2018 and swiftly became one of the darlings of a sector heavily exposed to the big-spending Asian consumer.

From a low of 97.38 euros at the start of 2019, the share price soared almost 50% to 144 euros by November.

The news since hasn’t been so good.

Firstly, the company was the target of a 190-million-euro fraud at a Thai factory. As a company with a market capitalization of more than 60 billion euros, this shouldn’t make a big difference, but it highlighted industry concerns about the way the company was being run with the European management teams of the two newly-merged companies clashing.

Then came the ongoing coronavirus outbreak in China, now officially called Covid-19. With entire cities in the world’s second-biggest economy cordoned off and travel severely curtailed, the luxury industry faces a major sales hit.

Chinese consumers account for more than a third of global spending on luxury goods, while consultancy Bain & Company estimated they accounted for 90% of last year’s increase in revenues to 281 billion euros.

Finally, earlier this month EU antitrust regulators opened an in-depth investigation into the company’s 7.2-billion-euro bid for Dutch opticians group GrandVision on the grounds the deal could push up prices. It will decide by June 22 whether to clear or block the deal.

EssilorLuxottica’s share price has rebounded back a touch to 138 euros, after falling to 134 euros at its low point in 2020. And Morgan Stanley (NYSE:) sees plenty more upside.

“EssilorLuxottica looks set to be the winning player in the consolidating and structurally growing eyewear industry,” is said in a research note this week.

The bank has a conservative 12-month price target of 150 euros. This is based on synergies from the original merger in the region of 800 million euros, at least 200 million euros ahead of company guidance; the GrandVision acquisition getting full regulatory approval by the final quarter of this year and adding another 350 million euros of synergies; and a positively skewed risk/reward basis as the stock has underperformed all other best-in-class global consumer players over the past year.

But Morgan Stanley (NYSE:) also sees upside to 200 euros over the next 12 months in a blue-sky scenario of impeccable execution.

2. Powell Didn’t Do All the Fed Talking

There were two days of testimony (with Q&A) from Federal Reserve Chairman Jerome Powell this week. Powell appeared before Congress for his semiannual appearance and naturally most of the Fed headlines were about the chief of the FOMC.

But there were plenty of other Fed officials offering insights.

The comments were mostly positive, chiming with Powell’s analysis that the U.S. economy still looks solid.

Cleveland Fed President Loretta Mester said Covid-19 was a risk to her forecast, but stuck by her view of GDP up 2% this year. New York Fed President John Williams (NYSE:) said the U.S. economy is in a “very, very good place,” while St. Louis Fed President James Bullard said rate cuts had set the stage for a soft landing to 2% growth with no deeper slowdown.

But Minneapolis Fed President Neel Kashkari thinks there’s plenty more Fed ammunition, suggesting the FOMC should still be cutting rates from the current level of 1.5% to 1.75%.

Monetary policy is “close to neutral or slightly accommodative today, but not very accommodative,” Kashkari said at a town hall.

As for Covid-19, “(i)f it really was large enough to hit the U.S. economy, one could imagine monetary policy responding, not to the virus itself but to just to try to help the U.S. economy manage its way through until the public health officials can get their arms around it,” he said.

And Kashkari had a Valentine’s Day wish for all the Fed Heads on Twitter.

Roses are red

Violets are blue

Last year I said there’s slack in the labor market

Today it’s still true

3. The Biggest Oil Shock Since 2008?

Oil prices managed a weekly gain on hopes that OPEC and Russian will come through with production cuts that balance the demand destruction that’s already being seen from China’s slowdown due to Covid-19.

But some are arguing that OPEC’s plan of cutting 600,000 won’t be enough to help prices when facing what could be the biggest disruption since the Financial Crisis.

“The economic shut-down in China will cause the largest negative oil demand shock since 2008,” Bjørnar Tonhaugen, Rystad Energy’s senior vice president and head of oil markets, said in a note.

“Even though the chaos unfolding in Libya has wiped out most of its oil production, and even if OPEC’s output cuts are fully applied, they will not be enough to fill the demand gap now exacerbated by the coronavirus,” Tonhaugen said.

Rystad predicts a first-quarter surplus of 700,000 bpd and a stock build of 1.3 million bpd.

And while “the third quarter looks a bit better for balances … fourth quarter balances suggest continued pressure on the market and OPEC+ despite the warranted extension of the current output agreement through year-end,” it said.

Original post: Source link