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LIVE MARKETS-Auto sector: the storm before growth

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·13-min read
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* European shares rise, tracking recovery in China equities

* STOXX 600 set for best day in nearly 4 months, up 1.5%

* Denmark's Ambu shares surge 26% after Q1 beat

* Hyundai to suspend S.Korea production on coronavirus impact Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters. You can share your thoughts with Thyagaraju Adinarayan (thyagaraju.adinarayan@tr.com), Joice Alves (joice.alves@tr.com), Julien Ponthus (julien.ponthus@tr.com) in London and Danilo Masoni (danilo.masoni@tr.com) in Milan.

AUTO SECTOR: THE STORM BEFORE GROWTH (1558 GMT)

After the UK said today it plans to ban the sale of new petrol, diesel and hybrid cars from 2035, shares of electric car maker Tesla jumped 16%, but with 98.5% of global vehicles still running on gas what's the deal for the overall auto sector?

Scotiabank analysts think in the long run there is still significant growth opportunity in emerging markets where per capita vehicle ownership is still very low.

However, 2020 is going to be extra hard for automakers and it anticipates another decline in sales for a mix of global factors including coronavirus epidemic in China, more regulatory headwinds in Europe and political uncertainties particularly in the lead up to the U.S. presidential elections.

"European markets will confront more regulatory headwinds, while other markets will face a 'holding pattern' as they await an abatement of global (and sometimes domestic) uncertainty before an anticipated recovery takes hold in 2021," it writes.

(Joice Alves)

Write to Joice at Joice.alves@thomsonreuters.com or https://twitter.com/joiceal

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IS ESG A VALUATION BOOSTER? (1534 GMT)

Credit Suisse has looked into whether high scoring ESG companies are more expensive than low scoring peers and the simple answer is: mostly not.

While on a regional level the Swiss bank found no support for the view that higher ESG scoring stocks are more expensive, on a sectoral level this holds true only in a handful of cases.

According to CS, these are business services, consumer services, healthcare equipment and semiconductors in Europe and consumer durables and consumer services in the U.S..

".. one cannot claim that ESG scores are correlated with high or low valuation levels", they conclude. "Nevertheless our conversations with investors clearly show an interest in finding companies that match strong ESG scores with strong operational and even valuation support".

(Danilo Masoni)

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TESLA BUZZ: WITH A LITTLE HELP FROM JOHNSON? (1409 GMT)

What's happening with the Tesla is just simply spectacular!

The crazy short squeeze has thrusted the stock on a high-speed lane towards more than double the infamous $420 price tag (remember Musk's "funding secured"?).

If gains from premarket trading sustain (+15%), Musk's baby will have a whopping $160 billion+ in market value -- that's as much as GM + Ford + Daimler + Fiat Chrysler combined.

It's often hard to get what's exactly behind the skyrocketing Tesla share price. We're wondering whether Elon Musk is getting a bit of spreading the buzz around his company from Boris Johnson who wants Britain to ban the sale of new petrol, diesel and hybrid cars from 2035, five years earlier than planned.

Now, we're obviously not saying Johnson's announcement is behind the latest frenzy on the stock but there's definitely some tailwind blowing into the stock's sails.

With a massive 98.5% of global vehicles still running on gas, there is a huge potential for electric cars to grow multi-fold with Tesla having an early entrant advantage having sold more electric cars than any other company in the world.

On twitter, the new 2035 deadline is making quite a buzz among Tesla fans:

(Thyagaraju Adinarayan and Julien Ponthus)

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WHAT DIP? (1350 GMT)

Lots of notes out there from sell and buyside about buying the coronavirus dip but so far the damage to broader indexes in Europe and the U.S. is rather limited.

The STOXX 600 is down just 1.7% since its closing level on Jan 17, the last trading session before the virus outbreak on Jan 20. The S&P 500 instead is down 2.4%.

Clearly the much-talked-about buying opportunity is something that may have show up only for stock pickers. More broadly, worth checking out this post again: The harder the fall, the bigger the bounce

(Danilo Masoni)

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GIVE TELCOS A CHANCE (1228 GMT)

Investing in telcos is not for everyone as fierce competition, big debt piles and the need to carry out costly network upgrades have often resulted in poor company performance and unattractive investor returns.

It could be different this time, at least in France! And, according to Exane BNP Paribas it's worth giving the sector a chance.

"Barely a year has gone by in the last 7 when there haven't been bold predictions about consolidation or an improving French telecom market. The reality has generally failed to live up to the hype," they say.

"That was until the second half of 2019, which arguably was the best period for French telcos in recent memory; with signs of price rationality and lower promotional activity", they add.

Now the big question is whether the trend is sustainable and Exane does believe so.

Why? Well, the French bank says competition and demanding capex requirements have forced operators into a series of asset sales, off balance sheet financing, whose costs will need 1-2% annual price increase as an offset.

Hence, they upgraded Iliad, Altice Europe and Bouygues all to "outperform".

(Danilo Masoni)

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"CONTRARIAN BUY SIGNAL": IT'S A BTD PARTY! (1217 GMT)

It's already midday and European bourses are cruising at double (+1.2%) the speed futures were trading prior to the open. Stock pickers, bargain hunters seem be gearing up for what is morphing into a pretty straightforward buy-the-dip session.

Last week's losses are proving to be an attractive entry point if one believes that stronger economic growth is on its way.

"It usually pays to buy when others are panicking, so we are starting to add to equity positions in our multi asset funds in anticipation of stronger growth later in the year", writes Trevor Greetham at Royal London Asset Management.

"Intensifying concerns over the impact of the coronavirus outbreak triggered the worst week for stocks since August 2019 with China particularly hard hit", he also said.

"As a result, our investor sentiment indicator is registering its first contrarian buy signal since that time", he added.

You can see below that it has actually been a while since the MSCI World Index posted such a big weekly loss:

Do you think the BTD party is going to last or is this just a temporary moment of respite before markets realise how serious the situation is?

Drop me an email to share your thoughts: julien.ponthus@tr.com

(Julien Ponthus)

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MORNING RESEARCH ROUNDUP: 'WE-NO-VIRUS-EXPERTS-BUT'... (1038 GMT)

It's a difficult and speculative exercise which often begins with a humble disclosure on the lines of "we're no virus experts but..."

It's usually followed by something about SARS not being that useful as a precedent given China's exponential growth since 2003.

Got it? Yes, we're talking about coronavirus research notes from banks which are proving to be quite a challenge for sell-side and buy-side analysts given the highly speculative nature of the subject.

Many strategists are obviously working hard to help their clients go beyond obvious conclusions such "if it's nothing serious it's all right, and if it's really serious then it's not".

Here's a round up of interesting points from this morning's research batch:

UBS

"Our projections assume that the virus will be controlled by 1Q, China's growth to rebound back to 6% by 2H. Thus, the supply chain disruptions are more temporary.

We see risk of Korea and Taiwan GDP growth falling below 1.5% and 1.2% if China's growth falls to below 5% under the scenario that virus is only controlled by 2Q".

Black Rock

"Positive corporate earnings have limited equity losses triggered by worries about the coronavirus outbreak in China and its potential economic impact. Moderating trade tensions, signs of economic stabilization and still accommodative financial conditions are supportive of growth".

Jefferies on insurers:

"Some of the most costly consequences could affect the non-life industry, where business interruption and event cancellation risks are rising.

Lloyd's of London and Swiss Re could be most at risk - In terms of the most exposed insurers, we highlight Hiscox and Beazley, as we expect that bespoke cover such as event cancellation is most likely to be written in Lloyd's of London".

Sentix

"(...) anyone who is afraid of a portfolio contagion has probably already reacted in the previous week.

So, is the worst over? In view of the sentix data and the resulting statistical properties of the current data constellation, we would say: probably yes."

S&P

Our base case projection assumes the coronavirus crisis will stabilize globally in April 2020.

Our worst-case projection holds that the virus stops spreading in late May, and optimistically in March.

In turn, this suggests that the peak impact on economic activity across Asia-Pacific will be in the first and second quarters. Growth should stabilize later in 2020 and recover through early 2021 as the temporary effect on activity wanes.

Here's UBS' chart on growth in China, Hong Kong, Korea and China:

(Julien Ponthus)

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CARS, PHONES AND THEIR CHINA DEPENDENCY (1026 GMT)

Auto stocks have started 2020 on the backfoot due to worries of potential tariffs by Washington and supply chain disruptions due to coronavirus. Of late, it has been more about the bottlenecks in parts supply as the world's second biggest economy is on sick leave.

With factories shut and an entire city locked down, companies dependent on Chinese industries for components to make cars/phones are either scrambling to find alternatives or ending up suspending production.

Hyundai Motor was the first suspend production outside China. They temporarily closed production in South Korea, its biggest manufacturing base.

Foxconn, which makes smartphones for Apple and others, could see a "big" production impact if a Chinese factory halt due to the coronavirus outbreak extends into a second week, Reuters reported citing sources.

"China is now a key component of global supply chains. Any sustained outbreak could disrupt the supply chains of certain industries, with potential for bottlenecks," BlackRock Investment Institute says.

The bottlenecks could also lead to companies calling off/delaying product launches, such as 5G phones, UBS analysts say.

Apart from the impact from disruptions, analysts also say "companies may feel more optimized to shift new product launches to when uncertainties from the virus is low and easier to attract customers' attentions" in the world's largest consumer market.

Here are some readings:

- Coronavirus impact: fragile, handle with care

- The cursed auto sector: coronavirus dents production

- Coronavirus: Who's who in Wuhan

(Thyagaraju Adinarayan)

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OPENING SNAPSHOT: A BIG REBOUND SPICED UP WITH BIG MOVES (0840 GMT)

No real surprise in the general direction of the market but the rebound we're witnessing at the open is a tad bigger than previously expected with the STOXX 600 now up 0.8%.

The FTSE 100 is the lead gainer among European blue chip indexes with a 1.3% rise, thanks to falling pound, which has been bruised again by renewed Brexit tensions and trading below $1.30.

That being said, there are quite a few wild moves among top movers which weren't all flagged in pre-market notes.

Denmark's Ambu is clearly the star performer with a 15% surge after its latest trading update. That said the stock has quite a reputation when it comes to price swings: in November it skyrocketed 25% after launching a new endoscope. It also posted share losses of 15%, 14% and 20% between August and May last year.

Second riser in NMC Health which made a 20% fall yesterday with traders still scratching their heads over the reason for the fall. While the stock is shorted by Muddy Waters, there's no clear apparent trigger for yesterday's fall and today's 8.5% rise.

It's more straightforward for Micro Focus's 14% fall after the British IT company said its executive chairman Kevin Loosemore would stand down this month after a "challenging year".

Allied Irish Banks is also sustaining a big hit, down 4.5% after setting aside a further 300 million euros to cover possible compensation owed to customers caught up in Ireland's mortgage tracker scandal.

While it's not a huge absolute move, BP's 3.8% jump on its dividend boost, is quite a big one considering the major's 120 billion dollar market cap.

Here's a list of the top moving shares:

(Julien Ponthus)

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ON THE RADAR: BP RISING, LACKLUSTRE CARLSBERG, ENIGMATIC NMC (0753 GMT)

One key performer for the session will be BP which boosted its dividend pay-out after reporting a Q4 profit beat. The stock is seen rising 2%-4% at the open, gaining further support from oil prices amid hopes for new OPEC production cuts.

So far pre-market indication give a lacklustre reception to Carlsberg’s trading update with shares seen dipping 1% after the Danish brewer said it expects to deliver mid-single-digit organic operating profit growth in 2020.

One of the sharpest move expected is in Swiss inspections group SGS, seen falling up to 10%, after the von Finck family cut its stake via an accelerated book building process.

Same story roughly for Wizz Air, indicated down, after its largest shareholder private equity firm Indigo Partners said it would sell shares worth 500 million pounds.

Among the stocks on the rise, Swedish engineering group Alfa Laval is seen up about 3% after reporting quarterly core earnings above market forecasts.

Pandora is also expected to gain about 3% after its trading update.

NMC Health shares are also expected to rebound sharply after their unexplained fall yesterday.

(Julien Ponthus)

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MORNING CALL: UP WE GO! (UNTIL WE DON'T) (0615 GMT)

European bourses are set to rise at the open, tracking Asia's tentative rebound as fears regarding the human and economic toll of the coronavirus epidemic seemed to ease somewhat.

There's a good chance the respite will prove very temporary though with the outbreak continuing to generate concerning headlines with Hong Kong reporting its first coronavirus death, the second fatality outside mainland China with the total death toll now at 427.

At the time of writing, European futures are up about 0.5% with financial spreadbetters at IG expecting London's FTSE to open 42 points higher, Frankfurt's DAX to gain 47 points and Paris' CAC to rise 19 points.

It's also a busy earnings day with results from BP, Carlsberg and Ferrari among others but not quite yet the Q4 galore expected on Wednesday and particularly Thursday.

(Julien Ponthus)

*****

(Reporting by Danilo Masoni, Joice Alves, Julien Ponthus and Thyagaraju Adinarayan)

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