Idea of the Day: German stocks at risk from a rising euro
City Index July 18, 2017 1:30 PM
What: with European earnings season kicking off the strength of the euro, EUR/USD has rallied some 10% since March, has started to worry some investors.
What: with European earnings season kicking off the strength of the euro, EUR/USD has rallied some 10% since March, has started to worry some investors. Already Swedish telecoms company Ericsson has seen its share price fall 11% on Tuesday after reporting weak earnings, and it sees weaker revenue trends in the coming quarters of 2017. Although Ericsson does not report in EUR, a chunk of its input costs are in the single currency, which could contribute to the weak outlook for revenue. With the majority of European companies set to announce results in the coming weeks, investors may already be pricing in the prospect of a strong euro hitting profits. Chart 1 below shows the Dax and the euro, as you can see in the chart, after moving together for most of this year, the euro and the Dax have started to move apart. This suggests that as the euro has strengthened to $1.15, the Dax is starting to suffer.
We believe that German carmakers could be at risk from the rising euro and the export-heavy automobile sector makes up nearly 12% of the entire Dax index. If the euro persists in strengthening then a deeper sell off in the overall Dax index could also be on the cards.
How: Daimler, BMW and Volkswagen are the top three car makers in Germany. As you can see in chart 2, Volkswagen has outperformed its peers since April, as the beleaguered German car maker has staged a recovery after the long-running emissions scandal. We believe that Volkswagen could follow Daimler and BMW lower in the run up to its next earnings release on 27th July, where a strong euro could hit revenues. If this turns out to be the case, then we would expect Volkswagen to play catch up with its peers, and it may experience a period of underperformance in the days and weeks after its earnings release.
Source: City Index and Bloomberg
Source: City Index and Bloomberg
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