The slowdown in China’s economy is having a ripple effect on European businesses, especially those heavily reliant on Chinese demand.
From luxury brands to car manufacturers, the impact is significant and could worsen if China’s economic issues persist.
European Companies Feeling the Heat
Several high-profile European companies are already experiencing the repercussions of China’s economic downturn.
Hugo Boss AG, Burberry Group Plc, and Daimler Truck Holding AG have reported negative impacts on their profits due to cautious spending by Chinese consumers.
LVMH recently joined this list, revealing a 14% drop in sales in the region including China during the second quarter.
The Broader Implications
The reduction in Chinese spending on European products has far-reaching implications. Not only does it threaten profits, but it also poses risks to share prices, company valuations, and even employment.
For example, Swatch Group saw a 30% decline in China sales in the first half of the year, prompting the company to cut production.
Challenges Facing China
Hopes that China’s economic issues are temporary might be misplaced. The country is grappling with multiple challenges, including a deepening property crisis, declining consumer spending, and rising trade tensions. These factors complicate any potential recovery.
Strategic Responses
Goldman Sachs strategists have recommended that investors sell European stocks heavily exposed to China.
Arun Sai, senior multi-asset strategist at Pictet Asset Management, expressed concern over the exposure to China.
He highlighted that profit warnings from European companies this earnings season have flagged the risk of weaker-than-anticipated demand from China, particularly from consumers.
Immediate Impact on Earnings
The immediate effects of China’s slowdown are already evident in the earnings of European companies, suggesting a challenging reporting season ahead.
Luxury brands, which had heavily invested in the Chinese market, are now under pressure. Shares in Hugo Boss and Burberry dropped recently after both companies issued profit warnings.
Porsche AG, a German car maker, also suffered a slump due to supply shortages exacerbated by slowing Chinese sales.
Stock Market Performance
A Goldman Sachs basket of European stocks with high sales exposure to China has underperformed the broader market this year.
Strategists like Lilia Peytavin advise selling such stocks in favor of those with higher US sales reliance.
China’s Modest Measures
While Chinese authorities have announced some growth-friendly measures during their recent Third Plenum, there appears to be little urgency to boost demand or address the property slump.
This suggests that European companies, which had thrived during China’s boom, may face a prolonged slowdown in Chinese appetite for foreign goods and services.
Germany’s Vulnerability
Germany, in particular, is highly vulnerable to the Chinese slowdown. UBS strategists estimate that Germany accounts for half of the European Union’s exports to China.
Individual companies, including miners BHP Group and Rio Tinto Plc, bank Standard Chartered Plc, and car maker Volkswagen AG, derive more than 40% of their revenue from China.
Broader Economic Impacts
According to strategists led by Gerry Fowler, the domestic weakness in China, combined with a slowdown in the US, poses a significant risk to the nascent European recovery.
Swatch, for example, is responding to the drop in Chinese demand by cutting production by 20% to 30% and reducing costs, although it is not significantly reducing its workforce in Switzerland.
High-Tech Sector Hit
Companies in the high-tech sector are also feeling the pinch. ASML, which relies on China for almost half its sales, saw its stock plummet 17% last week amid concerns that the US could impose new restrictions on companies supplying advanced chip technology to China.
Emerging Competition
China’s emergence as a competitor in various sectors, from semiconductors to chemicals, is another challenge for European manufacturers.
This rivalry is manifesting in the form of tariffs, with the EU imposing temporary duties on Chinese-made electric vehicles.
This uncertainty is affecting earnings, as seen with Sweden’s Volvo Car AB, which has lowered its auto sales forecast for this year.
Looking Ahead
As the earnings season progresses, investors will closely watch the guidance from export-sensitive European companies.
They will look for indications of how these companies perceive the impact of China’s economic conditions, both as a market and a competitor.
Sunil Krishnan, head of multi-asset funds at Aviva Investors, emphasized that this will be a crucial theme in the coming months.
Conclusion
The slowdown in China’s economy is creating significant challenges for European businesses. From reduced profits to stock price pressures, the impact is widespread.
As China grapples with its internal economic issues, European companies must navigate this challenging landscape, making strategic adjustments to mitigate the risks.
Investors and businesses alike will need to keep a close eye on developments in China and their potential implications for the global economy.