Why Autocallable BRC on Swatch Group currently generates a high coupon

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  • Of all the watchmaking companies, Swatch Group is most strongly focused on China and Hong Kong. In recent weeks, shares have benefited from the improved sentiment on the markets and, according to Vontobel analysts, have exhausted their price potential.
  • The concern of a second corona wave has also brought volatility to the stocks.

This makes the shares interesting for yield enhancement products: Barrier reverse convertibles bring higher coupons in this phase. For example, a one-year Autocallable Barrier Reverse Convertible (1230) on Swatch Group generates a coupon of up to 9.40% p.a. with an American barrier of 65% and an Autocall Level of 100% on quarterly observation.

The reasons for our assessment

  • Swiss watch exports were severely affected by the Covid-19 lock-down. In the four months from March to June, they fell globally by around 45%.
  • From a low of -96.8% in May, watch exports gradually recovered, reaching -11.9% year-on-year in August.
  • China is the market that has recovered the fastest, with an increase of 1.6% in the first eight months. This positive development has to be put somewhat in the context of the very strong decline in tourism. For example, Chinese consumers currently travel less in general, but significantly less to Hong Kong in particular. As a result, exports to Hong Kong, once the largest export market for Swiss watches, have fallen by 48% in the year to date. If the two markets are taken together, the decline is around 20%.
  • Of all the watchmaking companies, Swatch Group is most strongly focused on China and Hong Kong. Accordingly, the titles have benefited from the improved mood in recent months, particularly in China. A second wave of Corona could interrupt this positive trend.
  • Furthermore, the structurally negative trend in the lower price segment, which is driven by the shift to smart watches, is likely to continue.
  • In view of these factors, Vontobel analysts believe that the share’s upside potential is currently limited.
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