A 25% surge in Chinese stocks, fueled by Beijing’s recent stimulus measures, has left global money managers scrambling to gain exposure to the country’s stock market.
However, despite these attractive gains, there are significant risks for investors looking to benefit through global companies with a presence in China.
Chinese policymakers have introduced a series of initiatives aimed at reviving the country’s ailing economy.
These include interest rate cuts, mechanisms to bolster the onshore stock market, and plans for further fiscal stimulus to boost consumer and business confidence.
The rapid implementation of these measures has fueled optimism in China’s domestic market, but global firms—especially those based in the US and Europe—may not enjoy the same benefits as their Chinese counterparts.
Global firms face unique challenges in China
Despite the optimism surrounding Chinese stocks, global companies with exposure to the country have encountered a range of issues in recent quarters.
US and European firms with significant business in China have been hit hard by weaker demand, rising domestic competition, and a shift toward nationalist policies by the Chinese government.
According to a client note from Bank of America strategist Savita Subramanian, US mutual funds are overweight in just 18 of the 50 S&P 500 companies with the highest sales in China.
This positioning reflects caution, as many of these companies are grappling with challenges that are unlikely to be resolved by Beijing’s stimulus.
Key global companies with significant China exposure include chip manufacturers like Nvidia, Broadcom, Applied Materials, and Qualcomm.
Consumer-oriented brands such as Nike, Apple, Starbucks, and Lululemon, along with healthcare firms like Merck and Danaher, are also widely held by US mutual funds.
However, many of these firms have reported difficulties in their China operations, driven by reduced demand and increased competition from domestic rivals.
Impact of Beijing’s stimulus likely to benefit domestic firms
Most analysts expect Beijing’s fiscal stimulus to focus on helping lower-income consumers, which could benefit domestically oriented staples companies rather than global luxury brands that have been struggling in China.
For example, Bank of America analyst Ashley Williams predicts that luxury revenue in mainland China could fall by 15% annually for the next two years.
Williams notes that many Chinese shoppers are choosing to purchase luxury goods abroad, with luxury spending outside mainland China expected to rise to 50% by next year, up from around 33% in the first half of 2024.
This shift in consumer behaviour poses significant risks for global luxury brands such as LVMH, Ermenegildo Zegna, and Kering.
Lower domestic luxury spending could lead to margin pressures and reduced earnings estimates for these companies in the coming years.
As a result, Williams downgraded all three companies from Buy to Neutral.
US-China tensions complicate business for global firms
Another major challenge facing global companies with operations in China is the increasingly strained relationship between the US and China.
Semiconductor giant Nvidia is one such company caught in the crossfire of this geopolitical tension.
As the US tightens its restrictions on China’s access to advanced technology, Chinese data centre and artificial intelligence companies have been encouraged to reduce their reliance on Nvidia’s GPUs.
Experts say Beijing is attempting to push domestic firms toward GPUs produced by Chinese tech company Huawei Technologies.
However, there are questions surrounding Huawei’s ability to meet demand and the quality of its chips, which are produced by the domestic chip maker SMIC.
In addition to the challenges posed by China’s nationalist policies, global businesses must navigate Beijing’s restrictions on data access and limitations on foreign firms conducting due diligence.
These structural issues are unlikely to be addressed by Beijing, further complicating operations for international companies in the region.
Meanwhile, the Biden administration is moving forward with plans for a new package of export controls targeting China, which could exacerbate tensions between the two countries.
Uncertainty remains for global investors
Despite the sharp rise in Chinese stocks, significant uncertainties remain for global investors.
While Beijing’s economic measures have provided a short-term boost, the long-term outlook for foreign companies operating in China is fraught with risks.
Global firms face the dual challenge of weaker demand in China’s market and geopolitical tensions that could hinder their ability to compete with domestic rivals.
Although details are needed for the recent surge in Chinese stocks to sustain momentum, some money managers remain optimistic, believing that Beijing is rethinking its approach to economic stimulus.
However, for now, many are wary of the challenges global companies face in benefiting from China’s economic revival.
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