Provide Chain Chaos, Surging Prices Set to Plague Europe’s Income

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By Michael Msika and Macarena Munoz

(Bloomberg) —

Value pressures, supply-chain chaos and a reopening letdown are set to plague Europe’s third-quarter earnings season, setting buyers up for extra disappointment than elation.

Whereas robust numbers from behemoths like LVMH and SAP SE reassured European inventory buyers final week, additional excellent news could also be wanted to maintain the rally alive. Rising inflation and a stalling international restoration pose a problem to additional market positive aspects.

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“We count on fewer optimistic earnings surprises, extra cautious company steering and fewer earnings upgrades by analysts,” stated Robert Greil, chief strategist at German personal financial institution Merck Finck.

Right here’s what buyers are going to be watching as firms roll out their outcomes: 

Logistical Nightmares

Pandemic-related chaos, post-Brexit customs checks and a scarcity of truck drivers have wreaked havoc on provide chains. 

Clothes firms have been sounding the alarm forward of the all-important vacation season, with on-line retailer Asos Plc warning that supply-chain issues are set to hit revenue, whereas Hennes & Mauritz AB and Boohoo Group Plc have flagged supply delays. Asos and Boohoo shares plunged after the bulletins.

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“We count on firms to wrestle with provide constraints and rising enter costs,” stated Salman Ahmed, international head of macro and strategic asset allocation at Constancy Worldwide.

Shares to observe embrace: Sportswear retailers Puma SE (earnings due Oct. 27) and Adidas AG (Nov. 10), on-line retailer Zalando SE (Nov. 3), delivery agency A.P. Moller-Maersk A/S (Nov. 2), industrial group Siemens AG (Nov. 11).

Rising Prices

Prices have been climbing for firms, a product of provide bottlenecks, surging commodity costs and a scarcity of staff. Traders will probably be watching carefully which companies must swallow rising costs and that are capable of go them on to prospects.

“Particular consideration should be paid to the influence that logistical issues in provide chains, rising power prices and upward strain on labor prices could have on outcomes,” stated Jose Antonio Montero de Espinosa, head of European equities at Santander Asset Administration. “In the course of the third quarter we now have witnessed one of many intervals with the best enhance in inflation expectations in Europe.”

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Power producers might be pure beneficiaries. The Stoxx 600 Power Index is up 19% over the previous three months and is the top-performing sector in Europe. Earnings development estimates for the sector have accelerated over the previous few weeks as oil and fuel costs have soared.

Shares to observe embrace: Dairy-products maker Danone SA (Oct. 19), fertilizer producer Yara Worldwide ASA (Oct. 20), household-products firm Reckitt Benckiser Group Plc (Oct. 26), brewer Anheuser-Busch InBev SA (Oct. 28), chemical compounds maker Solvay SA (Oct. 28), oil majors Royal Dutch Shell Plc (Oct. 28), TotalEnergies SE (Oct. 28) and BP Plc (Nov. 2).

Chip Crunch

The lockdowns pressured many individuals to conduct their lives within the digital realm, which boosted demand for devices. Consequently, demand for the chips that energy these gadgets rocketed, hitting automakers to smartphone giants like Apple Inc.

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The chip state of affairs doesn’t look set to ease any time quickly, judging by the early warning indicators from the automotive sector. Elements provider Faurecia SA and truck producer Traton SE reduce forecasts final month, whereas Volkswagen AG stated that it faces a big order backlog as a result of a scarcity of chips.

Nonetheless, the chipmakers themselves may benefit. A latest replace from Taiwan Semiconductor Manufacturing Co. confirmed that demand stays sturdy, with the Asian bellwether’s projections for the fourth quarter beating some analysts’ estimates.

Shares to observe embrace: Semiconductor-equipment maker ASML Holding NV (Oct. 20), auto-chip suppliers STMicroelectronics NV (Oct. 28) and Infineon Applied sciences AG (Nov. 10), carmakers Volkswagen AG (Oct. 28) and Stellantis NV (Oct. 28)

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READ: For Tech With Value Energy, Inflation Is Good Information: Taking Inventory

Reopening Letdown

It’s been actuality verify time for firms that acquired a lift through the lockdowns, now that restrictions have eased. Distant software program maker TeamViewer AG plunged 25% within the house of in the future after reducing forecasts as a result of weaker demand from enterprise prospects. On-line meals supply firm Simply Eat Takeaway.com NV was one other casualty, dropping after posting a slowdown so as development.

“The market will probably be extra demanding with these sectors which have carried out very positively this yr,” stated Cristina Benito, head of equities for discretionary portfolios at Mapfre Asset Administration.

Shares to observe embrace: Meals-delivery agency Deliveroo Plc (Oct. 20), computer-hardware maker Logitech Worldwide SA (Oct. 26), meal-kit maker HelloFresh SE (Nov. 2), mobile-messaging software program maker Sinch (Nov. 2).

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READ: TeamViewer Warning a Wake-Up Name for Europe’s Lockdown Darlings

General, earnings expectations for the third quarter are excessive, with analysts predicting about 60% development for firms within the Stoxx 600. Nonetheless, the financial backdrop has develop into much less favorable and analysts are slowing the tempo at which they’re elevating revenue estimates. 

“We predict the rebound in Stoxx 600 EPS has largely run its course, with our macro projections in line with solely marginal additional upside by early subsequent yr,” Financial institution of America Corp. strategist Milla Savova stated in emailed feedback.

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