European luxury brands and industrial giants are grappling with significant financial challenges due to China’s economic slowdown, which has dampened demand and affected profits.
Prominent companies like Hugo Boss AG, Burberry Group Plc, and Daimler Truck Holding AG have all reported adverse effects on their bottom lines, as Chinese consumers become more cautious. LVMH, a leading luxury goods manufacturer, also revealed a 14% drop in sales within the Chinese market for the second quarter, leading to a 5% drop in its stock price early Wednesday in Paris. Over the past year, LVMH’s shares have fallen by 23%.
The reduction in spending on European products has far-reaching consequences, potentially impacting profit margins, share prices, company valuations, and employment. For instance, Swatch Group experienced a 30% decline in sales in China during the first half of the year and is now scaling back production.
While some executives remain hopeful that this downturn might be temporary, uncertainties about China’s economic recovery remain. The country is facing multiple issues, including a worsening property crisis, declining consumer spending, and escalating trade tensions.
Goldman Sachs strategists have advised investors to offload European stocks with heavy reliance on Chinese sales. “We are concerned about the exposure to China,” stated Arun Sai, senior multi-asset strategist at Pictet Asset Management. “Profit warnings from European companies during this earnings season have highlighted the risk of weaker-than-expected demand from China, particularly in the consumer sector.”
The impact of China’s economic difficulties is already evident in current earnings reports, raising concerns as the earnings season progresses. Luxury brands, in particular, have heavily depended on the Chinese market, and the current slowdown is putting significant pressure on them.
Shares in Hugo Boss and Burberry dropped sharply last week following profit warnings. Similarly, Porsche AG saw a decline in stock value due to both supply chain issues and reduced sales in China. Industrial manufacturers are also feeling the strain, with ABB Ltd. attributing a significant drop in orders from China to its poor quarterly performance.
Goldman Sachs’ index of European stocks heavily reliant on Chinese sales has underperformed the broader market this year. Analysts, including Lilia Peytavin, suggest selling these stocks in favor of those with a stronger dependence on U.S. markets.
Despite some recent growth-promoting measures announced by Chinese authorities, there has been little urgency to stimulate demand or address the property market slump. This ongoing slowdown suggests that European companies benefiting from China’s past economic boom may continue to face reduced demand for their goods and services.
Germany appears particularly vulnerable, with UBS strategists noting that it accounts for roughly half of the European Union’s exports to China. Companies like BHP Group, Rio Tinto Plc, Standard Chartered Plc, and Volkswagen AG, which derive over 40% of their revenue from China, are especially at risk.
Swatch, which produces Omega, Blancpain, and Tissot watches, is adjusting to decreased demand by reducing production by 20% to 30% and cutting costs, though it is not significantly altering its workforce in Switzerland. CEO Nick Hayek anticipates a potential recovery in demand from China but does not expect significant improvements this year.
Investor concerns about tariffs are also impacting European semiconductor equipment maker ASML Holding NV. With China accounting for nearly half of its sales, ASML’s stock dropped 17% last week amid fears of new U.S. restrictions on advanced chip technology exports to Beijing.
China’s emergence as a competitor in various sectors, including semiconductors and chemicals, is also affecting European manufacturers. Additionally, the EU has imposed temporary duties on Chinese electric vehicles, creating further uncertainty. For example, Volvo Car AB has adjusted its auto sales forecast for the year due to its EVs being produced in China.
As the earnings season continues, investors will be closely monitoring guidance from European companies sensitive to export markets, seeking insights into how they are coping with China’s dual role as both a market and a competitor, noted Sunil Krishnan, head of multi-asset funds at Aviva Investors.
