China’s economy is reeling – and these European companies are among the most vulnerable
Several signals from China this week suggest that European companies with close ties to the world’s second largest economy could face difficulties in the coming months. China’s central bank surprisingly cut interest rates on Tuesday to boost the flagging economy. Wall Street bank JPMorgan also raised its expectations for higher default rates in broader emerging markets, mainly on rising contagion fears in China’s depressed real estate sector. The investment bank’s risk assessment underscores fears that a slowdown in the world’s second-biggest economy will have a far broader impact. For example, in 2022 companies in the European Union relied on China as the third largest export market, with 230 billion euros ($250 billion) worth of goods and services sold to the country, according to Eurostat data. Analysis of CNBC Pro’s sales data found that companies in the mining, automotive, luxury goods, semiconductor and high-tech manufacturing sectors are most dependent on China. The table below shows the top 20 companies in the Stoxx Europe 600 index, with the largest share of sales directly dependent on China. Mining London-listed mining giants Rio Tinto and Anglo American have been among the most exposed to China relative to their combined sales. Shares of both companies have fallen 15% and 35% respectively this year on negative sentiment towards the materials sector. As one of the largest iron ore mining companies, Rio’s fate is closely tied to industrial demand for steel, the fate of which is now in the hands of the Chinese government, according to UBS analysts. “The Politburo’s turnaround has boosted sentiment, but policymakers need to follow suit to properly gauge the impact on commodity demand/prices,” the Swiss bank analyst told clients July 26 as they downgraded the stock. Elsewhere, RBC analysts told clients they “expect iron ore prices to weaken in 2023 on subdued Chinese steel demand estimates.” Automakers Porsche, BMW, and Volvo Cars are among the European automakers that make a large chunk of their money in China. With annual sales of 41 billion euros, BMW also had the largest exposure to China of any European non-oil company in the Stoxx Europe 600 index. However, long-term issues facing the auto sector, such as an order backlog due to supply chain issues in 2022 and growth in electric vehicle sales, have meant demand for cars remains buoyant. BMW shares are up 30% so far this year. However, according to Sitel analysts, there is a risk of a trend reversal in the stock. “BMW has the highest commitment to China among the European OEMs.” [original equipment manufacturers] — We prefer higher US exposure (which Mercedes has). Prices deteriorated (from a high level) in the second quarter compared to the first quarter. We expect further deterioration in the second half of the year. “BMW has a lower cash conversion rate than Mercedes,” Stifel’s Europe analysts, led by Daniel Schwarz, said in an Aug. 7 note to clients. Methodology: Sales data by region was only available for 422 of the 600 companies in the Stoxx Europe 600 Index. FactSet data is primarily based on disclosing geographic sales data from companies directly. If these are not available, FactSet applies a proprietary algorithm to estimate the revenue share percentage.
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