Chinese sneeze could give Europe Inc a nasty flu
DAX A PROXY FOR SINO-US DISPUTE AS GERMAN CARMAKERS, FRENCH LUXURY GROUPS FEEL HEAT
With sluggish growth translating into the most disappointing earnings in years, European stocks are set for a tough ride if a full blown Sino-US trade war erupts following presidents Donald Trump and Xi Jinping’s G20 dinner today.
The ongoing tariff dispute has already made the Chinese economy sneeze and given a cold to some of Europe Inc’s most iconic powerhouses due to their heavy exposure to the world’s second biggest economy.
This drag is set to continue even if Trump and Xi’s meeting ends cordially. If relations between the economic superpowers deteriorate further, the impact on many of Europe’s top firms could be profound.
Upmarket German car makers like BMW or French luxury houses such as Hermes have already been tagged as collateral victims of the Trump administration’s trade policy after sharp falls in their share prices.
With about six per cent, or roughly €80 billion (Dh334 billion) of its constituents’ revenues originating from China, Germany’s DAX is typically used as a proxy to bet on a trade war and is lagging, with a 12.5 per cent fall year-to-date, the less exposed pan-European STOXX 600 benchmark.
BMW will make 18 per cent of its revenue in 2018 from the world’s second-largest economy, while Volkswagen’s share stands at 14 per cent, according to Morgan Stanley.
Even if Germany, whose bilateral trade with China hit a record €188 billion last year, is a key concern, worries among investors are widespread.
A study conducted for Reuters by business insights platform AlphaSense shows a threefold increase in the number
If some of the underperformance of European bourses in comparison to Wall Street can be partially explained by the Trump’s administration tax cuts, many analysts believe the key lies elsewhere.
“Europe is very much exposed, being very cyclical, it’s an open economy and its stock markets already reflect that,” said Emmanuel Cau, European equity strategist at Barclays.
“European markets are quite vulnerable to a slowdown in emerging markets, not less given the domestic dynamic which is polluted by the political problems in Italy or Brexit,” he added.
Acknowledging slowing growth, the International Monetary Fund has lowered its growth forecast for China and since then indicators from automobile sales to e-commerce trends and production data are suggesting the world’s second biggest economy is cooling.
With creeping corporate and household debts, China is believed to have little room for manoeuvre for fiscal stimulus if it doesn’t want to weaken its currency, which the Trump administration believes gives it an unfair trading advantage.