(Bloomberg) — A broadening array of European firms is blaming China for glum earnings outlooks, as weak demand, government scrutiny and tariff spats with the trading partner put pressure on stocks.
Beyond China-reliant sectors such as luxury goods and miners, chip equipment giant ASML Holding NV, medical technology firm Royal Philips NV and French electrical-equipment distributor Rexel SA are among those that have raised concerns about Chinese demand.
Shares of all three are down in October after they cut guidance. Philips and ASML are set for their worst months in at least two years, buffeted by various headwinds including weaker demand, tighter regulations or the prospect of export restrictions.
“Weakness in demand from China started in a few sectors and has spread out beyond the consumer,” said Mark Schumann, head of European large-cap mutual funds at DWS. “The reasons for this weakness appear to be more complex and multi-layered,” he added, citing a prolonged property crisis in the country and higher regulatory scrutiny of US and European businesses.
An analysis by Barclays Plc found that European company executives had a negative tone 65% of the time when discussing China on post-earnings conference calls — the worst among topics that included the economy, profit margins and layoffs. That’s despite Beijing’s broad stimulus efforts unleashed in September to boost growth.
A basket of China-exposed stocks in the euro area has declined since the third-quarter reporting season began in mid-October. The broader Stoxx Europe 600 Index — which was already under pressure from anemic economic growth at home, political turmoil in France and a choppy labor market in manufacturing powerhouse Germany — has also edged lower in the past three weeks.
“Unfortunately for European companies, there is no obvious growth relay when both your domestic market and one of your main trading partners are slowing down,” said Julien Lafargue, chief market strategist at Barclays Private Bank. “The US is unlikely to take up the slack, especially if the next administration is one that contemplates the introduction of additional import tariffs.”
ASML, Dutch light and lamps manufacturer Signify NV, eyewear producer EssilorLuxottica SA, French tiremaker Michelin and software company Hexagon AB were among companies whose mentions of China on earnings calls hit multi-year highs this season, according to a Bloomberg analysis of Stoxx 600 call transcripts.
Grim Remarks
While China accounts for about 8% of European firms’ overall revenue, some industries like luxury rely on it for up to a quarter of annual sales. Tech investor Prosus NV gets 74% of its revenue from there, while miners generate between 20% and 60%, according to data from Goldman Sachs Group Inc.
Many of these firms aren’t seeing much reprieve yet. Cosmetics maker L’Oreal SA said China’s beauty market continued to deteriorate, while LVMH warned consumer confidence was similar to the “all-time low reached during Covid.”
The world’s biggest brewer Anheuser-Busch InBev NV and Danish peer Carlsberg A/S both reported lower volumes Thursday, partly due to weak demand in China.
And more problems are emerging. Intense local competition has ramped up pressure on prices, according to Signify, while new tariffs on brandy imports from the European Union added to headaches for premium distiller Pernod Ricard SA.
Potential new restrictions on chip technology exports have prompted ASML to take a more cautious view on next year’s sales. Automakers are caught up in tit-for-tat tariffs on electric vehicles as part of the ongoing trade spat between Brussels and Beijing.
While more fiscal stimulus is expected from the country in November, it’s unclear how much of that will benefit firms outside China. For DWS’s Schumann, odds suggest more challenges ahead for European firms geared toward China.
“In our portfolios, we have not taken a specific bet on a China recovery and remain cautious, despite more encouraging signals recently from the political side,” Schumann said.
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Publish date : 2024-10-31 09:10:00
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