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Potential Winners From Easing Lockdowns Emerge

Courtesy of ZeroHedge View original post here.

Authored by Bloomberg macro strategists Michael Msika and Joe Easton

Equity investors tend to act in anticipation of the next big event, a fact that’s especially apparent in the current rebound. Even amid bleak economic data and earnings reports, European shares posted their best monthly gain since October 2015 and the U.K.’s benchmark FTSE 100 Index finally entered a bull market. The prospect of easing lockdown norms is starting to spur strong gains in some battered sectors.

Since the market bottomed on March 18, the Stoxx Europe 600 is up 22%, but those hammered in the preceding rout have risen a lot more: notably, the travel and leisure sector (46%), energy stocks (41%) and autos (35%).

Strategists including those at Sanford Bernstein & Co. and Barclays Plc had noted earlier that the rebound was not “risk on,” as value and cyclical stocks were getting left behind. Such shares had started to show tentative signs of a comeback as the rally broadened, before stalling.

Amundi SA head of equities Kasper Elmgreen remains cautious after the rally, but says he’s looking for high quality cyclical stocks with exposure to the demand recovery in consumer discretionary and industrials.

Competitive positioning and strong balance sheets are essential in stock picking, he says, adding that quality banks and insurers trading at attractive valuations and supported by central-bank measures fit the bill. He’s also constructive on the luxury sector in China and on leading sports-goods makers trading cheaply, but expects automotive stocks to report sharp declines in 2020 earnings.

Still, it might be a little late to play the bounce. Societe Generale strategist Andrew Lapthorne warns the economic fallout of the pandemic is mounting daily, with rising unemployment, a complete collapse of aggregate demand and the skyrocketing public cost of recovery.

“Given the overall negative undertone from the economic challenges ahead, the dramatic reversal of global markets after the pandemic lows is more puzzling, as it also implies an all clear victory against the silent enemy and a return back to the pre-pandemic normality,” he says.

Looking more specifically at the U.K., locally-exposed shares are once again benefiting from renewed sterling strength, with the FTSE 250 Index and the pound highly correlated. Despite the lockdown, the FTSE 250 has strongly outperformed the FTSE 100 since March 18.

The U.K.’s biggest homebuilders, like Persimmon Plc, Vistry Group Plc and Taylor Wimpey Plc are set to return to building sites in the coming weeks, which is “encouraging news” and implies the firms should start converting their order books into cash, hence further reducing the risks of liquidity crunch scenarios, UBS analysts say.

They see the sector as having sufficient liquidity to withstand at least three months of lockdown or zero-revenue. That said, the country is set to build 35% fewer houses than forecast this year, according to real-estate broker Knight Frank LLP.

As for the British retail sector, it’s up about 28% since March 19, even as questions linger about how such businesses might operate as restrictions ease, with Next Plc warning it expects sales to be disrupted even after the full lockdown has been lifted. Berenberg analysts say there is an opportunity for companies like Next to garner more market share as rivals such as Debenhams, New Look and River Island struggle in the current environment.

Some clothing and other non-food retailers have already succumbed to balance sheet and cash flow constraints, such as Debenhams and Cath Kidston, and it’s not over yet, according to Shore Capital analyst Clive Black. He expects many more independent and chain-based outlets to fail due to cash shortages and weak ongoing demand.

“Short-to-medium term U.K. consumer demand feels worrying to us,” Black says. “It remains to be seen how many businesses re-emerge from the current coronavirus crisis,” he added.


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