Global Companies Hurt by Slowing China
Comment of the Day

August 19 2015

Commentary by David Fuller

Global Companies Hurt by Slowing China

Here is the opening of this topical article by Nicole Bullock and Eric Platt of the Financial Times:

surprise devaluation of the renminbi has raised the stakes of an economic slowdown in China for global companies that have relied on the country as the engine of growth around the world.

All of that comes at a time when companies already have been buffeted by falling oil prices and a rising US dollar. Valuations, in the US at least, look stretched at 17 times for the S&P 500.

“We all knew that China’s economy was under pressure but the devaluation was an indication that it is worse than expected and that is a problem for corporate earnings,” says Nicholas Colas, chief market strategist at Convergex.

Blue-chip UK, US and eurozone companies in sectors long dependent on China, including carmakers, miners and luxury goods retailers, have endured the brunt of selling by investors this week. This comes when companies in the energy, materials and industrials sectors have been lagging badly for much of this year, with falling commodity prices suggesting demand from China has slipped into a much lower gear.

“Companies with sales of 20 per cent or more to China have been penalised in the market, but so have those that are tied to commodity prices where demand from developing regions has been key to the former super cycle thesis,” says Tobias Levkovich, head of US equity strategy at Citi.

“First and foremost has been the idea that Chinese demand wanes and the world is left with a glut of production and inventory that causes price discounting for everything from drugs to electronics to cars (and well beyond just oil and iron ore), which compresses corporate profits worldwide,” he adds.

Now the question facing equity investors is whether China’s devaluation can help bolster overall growth and demand for the products and services sold by global companies from the US and Europe. While share prices were stabilising in Europe and the US on Thursday, many believe the pressure is not likely to let up soon.

“In Europe, they’ve been banking on their exports looking cheaper — 40 per cent of European gross domestic product is exports — and the problem is again the Chinese are jumping on board to drive growth through an increase in exports,” says David Lebovitz, global market strategist at JPMorgan Asset Management.

David Fuller's view

Many investors are panicking over China’s economic slowdown and stock market volatility.  That said, the Shanghai A-Shares Composite Index is still higher on the year by 13.82% in US Dollar terms.   

The entire world, it seems, was counting on China to import ever more of their goods.  China does import many items, of course, and Chinese tourists are big buyers in overseas markets.  However, demand will obviously fluctuate in line with China’s GDP growth and consumer fashion.

Moreover, China’s government is also very ambitious in terms of its own manufacturing capacity.  Chinese imports, plus manufacturing in China by many overseas companies, and fashionable purchases by Chinese tourists provide useful information for its government.  China gains a first-hand view of the world’s finest and most popular products, including how they are manufactured and marketed. 

Armed with this information, China is in a strong position to reproduce the best and most fashionable of what it sees, from all over the world.  Chinese copies may not be quite as good as the originals, but most consumers will not care if they are nearly identical and less expensive.  

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