Why Savvy Investors Should Steer Clear of Europe's China-Exposed Stocks Right Now
As of September, Citi analysts strongly advise caution for investors eyeing European stocks with significant exposure to China, often referred to as "China proxies."
Despite the allure of low valuations following recent declines, Citi Research analysts caution that it is premature to capitalize on this weakness. The underlying challenges in China's economic recovery, coupled with a lack of meaningful catalysts, render these stocks a risky bet in the short term.
Key Points:
- China's Economic Struggles:
- China's economy has underperformed in 2024, jeopardizing Beijing's 5% GDP growth target.
- Weakened manufacturing output, with sub-50 PMI figures and growing deflationary pressures, indicate persistent macroeconomic issues.
- Limited Policy Support:
- While some policies like government bond issuance and minor rate cuts have been implemented, Citi does not foresee any major confidence-boosting measures that could rejuvenate the market.
- Stock Performance and Earnings:
- Citi's basket of China-sensitive European stocks (Bloomberg: CGRBECHS Index) is down approximately 7% year-to-date (YTD), underperforming the broader market and MSCI China.
- European companies heavily reliant on China have faced steeper earnings downgrades compared to their peers. For example, 2024 earnings per share (EPS) estimates for these companies have been revised down by 10% YTD, in contrast to a 3% decline across the Stoxx 600.
- Sector-Specific Challenges:
- Luxury goods, technology companies, and healthcare firms have been particularly impacted, with earnings expectations falling sharply as Chinese demand remains weak.
- The luxury goods sector, which derives around 30-35% of its global sales from Chinese consumers, has seen no significant rebound in demand.
- Technology companies, including European chipmakers, face low visibility into future Chinese demand, making it difficult to project a recovery. Industrial companies also have tempered expectations, with many not forecasting a recovery in China's manufacturing sector until well into 2025.
- Geopolitical Risks:
- The approaching U.S. 2024 election introduces additional geopolitical risks that could further impact the Chinese market and, subsequently, companies sensitive to its performance.
Analysis: What This Means for You
Breakdown for Easy Understanding:
- The approaching U.S. 2024 election introduces additional geopolitical risks that could further impact the Chinese market and, subsequently, companies sensitive to its performance.
- Current Situation:
- China's economy is not performing as expected, leading to a ripple effect on European companies that heavily rely on Chinese demand.
- Stock and Earnings Impact:
- Stocks of European companies with high exposure to China have dropped about 7% this year.
- Earnings forecasts for these companies have been revised down by 10%, compared to a 3% drop for the broader European market.
- Sector Struggles:
- Sectors like luxury goods, technology, and healthcare are struggling the most due to weak demand from China.
- Luxury goods, which rely significantly on Chinese consumers, are particularly hard-hit.
- Policy and Geopolitics:
- Despite some policy efforts, no major measures are on the horizon to significantly boost confidence in China's economy.
- Geopolitical risks, especially with the upcoming U.S. election, add another layer of uncertainty.
How It Affects Your Finances:
- Investment Risks: Investing in European stocks with high exposure to China is risky right now due to China's economic struggles and geopolitical uncertainties.
- Valuation Concerns: Although these stocks are cheaper, the lack of positive economic signals from China makes them a risky investment.
- Long-Term Perspective: While the current outlook is bleak, there may be future opportunities if China's economic situation improves or if the government takes stronger action to stimulate growth.
Bottom Line:
Citi's current recommendation is to avoid investing in Europe’s China-exposed stocks until there is more clarity on China's economic trajectory and stronger signs of policy intervention. The risks currently outweigh the potential rewards, making these stocks a precarious investment choice in the near term.
By taking a cautious approach and staying informed, you can better navigate these turbulent times and make more strategic investment decisions.