Investors are piling into stocks of European luxury goods and other sectors with exposure to China, believing they offer a safer way to profit from a possible recovery in the world’s second-largest economy than investing directly in its ailing stock market.
The Stoxx Luxury 10 index — whose constituents derive around 26 per cent of earnings from China, according to Barclays estimates — has risen 9.3 per cent this year, well ahead of the 0.8 per cent gain in the Stoxx Europe 600, a broad measure of the European stock market. Other equity sectors exposed to China, such as automakers and healthcare, have also outperformed.
Strategists say there are early signs that the flagging Chinese economy, which last year grew at one of its slowest paces in decades, will recover. However, they believe a rout that wiped close to $2tn off the value of its stock market makes it a dangerous place to invest.
European stocks offer “a safer way” of getting exposure to China, said Florian Ielpo, head of macro at Lombard Odier Investment Managers. “Most of Europe’s sectors could profit from an improvement in China and that improvement is not priced in yet.
“If you don’t want to be exposed to the structural problems but do want to be exposed to the cyclical recovery then European equities are the way to go,” he added.
Lombard Odier is overweight Europe in its portfolios. Ielpo said luxury stocks were the “obvious” place to invest, as well as healthcare, automakers and industrials.
European luxury stocks have been lifted in recent weeks by earnings from heavyweights LVMH and Hermès, which beat analysts’ forecasts, convincing some traders that valuations had been excessively beaten down by gloom about China’s economy. LVMH shares are up 9.2 per cent this year, while Hermès has gained 11.8 per cent.
Hermès CEO Axel Dumas brushed off concerns about a Chinese consumer slowdown last week. While he said he had noticed lower shopping mall traffic on his latest visit to the country, he added that this was not reflected in the company’s fourth-quarter figures.
“In some cases the negativity on China is quite overdone,” said Emmanuel Cau, head of European equity strategy at Barclays, which has “started to add back in China exposure selectively”, particularly in sectors like luxury.
Shares in carmakers Mercedes-Benz and Volkswagen — which both derive more than 30 per cent of profits from China, according to estimates by Barclays — have rallied 6.9 per cent and 14 per cent, respectively, since the beginning of the year.
China’s economy grew 5.2 per cent last year, according to official figures from Beijing, slightly above target but still one of the slowest rates in decades. Some economists believe this figure may be an overestimate, as Beijing seeks to quell concerns while the country continues to battle a property crisis and deflationary risks.
However, there are tentative early signs that economic activity may be picking up, say some strategists.
Data showed China’s services and construction sectors ticking up in January, with the non-manufacturing purchasing managers’ index rising to its highest level since September. Manufacturing continued to contract, but at a slower pace than the previous month.
Authorities have also recently ramped up efforts to boost market confidence, with the so-called “national team” of state-affiliated financial institutions pouring money into the market, and tightened restrictions on short selling.
China’s CSI300 index has tumbled 43 per cent from its all-time high three years ago, but has recently began to pick up following interventions from Beijing. International investors, however, remain extremely cautious.
BNP Paribas upgraded Europe’s luxury sector to overweight on Monday, a move that the bank’s head of equity strategy, Ankit Gheedia, said was “a better way to position for China” than either buying local equities or investing in European industrials.
European sectors most exposed to China, including luxury goods and industrials, could also benefit from growth in other regions, particularly in the US, thereby protecting investors against steep losses if the Chinese economy deteriorated, say analysts.
“A recovery in European equities is a more diversified bet” than direct investment in China, said Tomasz Wieladek, an economist at investor T Rowe Price.
Indirect bets on a Chinese recovery might also help investors avoid being caught out by fraying diplomatic relations between Beijing and Washington — especially in an election year where Republican frontrunner Donald Trump has already proposed steep tariffs on Chinese exports.
Even for those more pessimistic about China, some European stocks still offer a cheap option on a surprise recovery in the country’s economy.
Gerry Fowler, head of European equity strategy at UBS, remains downbeat on China’s outlook but nevertheless favours Europe’s “very beaten down” mining sector, which is heavily exposed to China, in the bank’s 2024 outlook.
This offered “cheap unloved exposure [to China] that would benefit from a recovery”, said Fowler. “We don’t expect it to go down but it could go up significantly,” he said.
Source: Economy - ft.com
