Pressure on China-Exposed European Stocks

China-exposed European stocks continue to face challenges despite fresh stimulus measures, according to UBS strategists in a Wednesday note.

Although China has announced additional monetary easing and capital injections aimed at stabilizing its economy, these actions are perceived as inadequate for generating substantial advantages for European companies.

UBS emphasizes that while monetary policy has historically mitigated risks, it has been less effective in stimulating demand. Without significant fiscal stimulus, the recovery in China remains limited.

“Fiscal policy is usually more quickly able to turn business cycles and to ignite the animal spirits of the private sector. We think this is particularly the case in a more centrally controlled economy like China,” the strategists wrote.

They pointed out that the private sector inherently follows the government’s lead. The absence of fiscal stimulus and ongoing governmental pressure on specific private sector areas continue to pose strong barriers to a more substantial recovery in China.

The current Chinese stimulus package emphasizes stabilizing the property sector, potentially offering some relief for European industries such as mining and industrials.

Companies like BHP, Rio Tinto (NYSE:RIO), Schindler, and Kone—exposed to the Chinese real estate market—might see limited advantages. However, UBS remains cautious about the broader impact on industries such as luxury goods, semiconductors, and chemicals, which are unlikely to benefit significantly from current measures.

Despite a modest rebound in China-exposed stocks in Europe—showing a 4% increase over the past week—this trend is viewed as unlikely to persist.

“Stay cautious on China exposure,” UBS advises, noting that China-exposed stocks have underperformed by 12% in the last two months. In contrast, European consumer stocks have generally outperformed, benefiting from high Covid savings, improving real incomes, and interest rate sensitivity, especially in the UK and Scandinavia.

UBS further highlights that the Chinese economy grapples with profound structural issues, including excess capacity and an overbuilt real estate sector, which continue to hamper growth.

Despite recent stimulus efforts, UBS believes the measures are “iterative rather than transformative,” indicating only modest potential benefits for European firms in the short-term. They added, “Any benefits to European companies at all may be modest and fleeting.”