China's economic slowdown is dealing a heavy blow to European companies that rely on Chinese demand
European companies, from luxury brands to car makers, are already feeling the squeeze imposed by China's slowdown, and businesses reliant on demand in Asia's largest economic giant can expect more trouble ahead.
Hugo Boss AG, Burberry Group Plc, and Daimler Truck Holding AG all say Chinese customers are growing more hesitant. LVMH joined the cavalcade late Tuesday, saying sales in its key Chinese territory fell by 14% during the second quarter.
LVMH shares dropped 5% in early trading Wednesday. They have been off by nearly a quarter for the past year.
earlier: China's Real Estate Development Forecast: Price-for-Volume Strategy.
For a continent banking on exporting its way out of trouble, that spells more than just fewer euros in the bank; it suggests weaker profits and poses risks for share prices, company valuations, and even jobs. The Swatch Group, for example, pinned a 30% drop in first-half sales in China and said it would cut production.
Some executives might take solace in the prospect that this is a temporary blip, but it remains uncertain what China can do to alter its trajectory. The country is contending with a laundry list of issues, from an escalating property crisis to faltering consumer spending and trade tensions.
European corporate profit warning
According to Goldman Sachs strategists, European stocks that generate most of their sales in China should be sold.
Arun Sai, senior multi-asset strategist at Pictet Asset Management, said, "We are worried about the China trade. "Such alarms from European corporates have already given an indication of disappointing demand from China, consumers, in particular, this earnings season, and another factor the Japanese multinational will be well aware of.
The earnings season, now entering its peak with the spread of reports over the next days and weeks to come, had already sent a shiver down Wall Street's spine when Apple CEO Tim Cook reminded markets earlier this month warning that China was experiencing an "economic downturn," something he stressed would impact on his numbers.
In recent years, the Chinese market has become especially lucrative; for proof of this, one need only look at how luxury brands, in particular, pinned their fortunes to that territory. For now, demographics are catching up with them.
Slumping shares in Hugo Boss and Burberry reflected last week's announcement of two profit warnings from major fashion companies. The German car maker Porsche AG was also down on Tuesday, as a component shortage piled pressure on slowing Chinese sales.
Industrial goods manufacturers are in focus, also after ABB Ltd. blamed a double-digit slip in Chinese orders for its poor quarter.
This year, a basket of European stocks identified by Goldman Sachs with high sales exposure to China has lagged the broader market. The likes Lilia Peytavin, a strategist who suggests dumping such stocks in favor of more US-centric names.
The crisis of German companies
Although Chinese authorities unveiled some growth-supportive measures at their twice-a-decade Third Plenum last month, there was little urgency to stoke demand or rein in the housing market downturn. The WSJ writes that it "means the slowdown in Chinese demand for goods and services from abroad is entering its second year, hitting European companies hardest.
Germany is arguably the most exposed, with UBS strategists reckoning it represents half of all European Union exports to China.
BHP Group and Rio Tinto Plc have the largest Highest income dependency among companies, with more than 40% of revenue coming from China, followed by Standard Chartered Plc and car maker Volkswagen AG. The former is a regional bank in Asia and one of Germany's major automakers. (Reuters)
The slowest economic growth in 30 years has dampened demand for basic base metals and industrial commodities. China shares gains took the shine off goldâconomists at Capital Economics noted. "Now that growth in both regions shows signs of weakening, the early stages of a European recovery are at risk - once more losing impetus to new headwinds from far away."
Swatch, which makes Omega, Blancpain, and Tissot watches, is reducing production to 20% or around 30%. It is also slashing costs, but "not a whole lot" of the company's employees in Switzerland are being laid off.
Chief Executive Officer Nick Hayek said on Wednesday that Swatch Group will be prepared to increase production again if demand in China picks up, but he does not expect a significant improvement this year.
ASML Holding NV (AEMY), Europe's third-largest company by market value, is also feeling the heat of reduced investor sentiment on tariffs.
With almost half of its sales generated out of China, shares in ASML fell 17% last week on concerns the US may take new measures against companies supplying advanced chip technology to Beijing.
EU's response to China's dumping
In the longer term, a different set of companies - such as chip makers and chemical businesses - are seeing China become an industrial rival that puts pressure on profits.
This rivalry also involves tariffs, with the EU placing provisional duties on electric car imports from China. That uncertainty is already impacting profits: Sweden's Volvo Car AB has cut its auto sales outlook for this year, citing disruptions in production in China, where it makes EVs.
"People will be looking particularly at guidance from the more export-sensitive European names, just looking for any signs of how they're seeing both the impact of China as an end market but also as a competitor," said Sunil Krishnan, head of multi-asset funds at Aviva Investors. "That will be a big theme."
Share