Even with the bounce over the last few trading sessions the Shanghai Composite is down 23% from its mid-June peak and combined with sharp falls in some commodity prices, has ignited fears over the Global macro backdrop. But we do not see the Chinese Equity market as a lead indicator of Global growth –in fact, it has had an inverse correlation over the last 18 months and our China Economist believes the transmission mechanisms to the real economy are relatively limited.
Back to Fundamentals? Moving into Q2 earnings season…
If we navigate the Greek crisis and the Chinese stock market, we may be able to re-focus on the fundamentals. As we have maintained, the key to Europe is earnings. We are now moving into the Q2 reporting season with close to 75 companies due to report by the end of this week. We suspect that this will be a reasonably strong set of results given: (1) the improving macro backdrop –a contrast to 2014, (2) the weaker Euro and, (3) high operational leverage.
How are European equities exposed to China?
For companies where China is specifically named, this makes up just 2% of total sales (but if we take into account estimated exposure of companies which do not break down China explicitly, we suspect the actual number is closer to c.6-8%). Sectors with high exposure to China and the region include Technology, some Consumer Staples and Materials (but some German Autos also have very high exposure by income).
Stock screen -exposure to China by revenues
Given the volatility around the Chinese market and the focus on the region, we thought it useful to update our European stocks with high exposure to China. As a group they have underperformed the European market since the peak in Chinese equities –there may be some opportunities if the follow through to the Chinese real economy is limited.