Fund manager comment: how China’s economy affects European equities
On 11 August 2015, China unexpectedly devalued its currency – a move welcomed by the IMF but met with fears from investors the Chinese economy was weaker than expected, triggering a global sell-off in equity markets.
China is changing
For European companies – such as those in the consumer staples, metals and miners, and luxury goods sectors – a weaker yuan and a slowing Chinese economy generally means lower demand for their products. That said, some of our senior investors at BlackRock have been on the ground in China, speaking with policy makers, business leaders and clients; the general feeling is there may have been something of an overreaction to the news coming out of the country.
The Chinese economy is shifting away from manufacturing more towards services, therefore focusing on the ‘old’ measures of economic strength (industrials, manufacturing) many analysts monitor may not be the right lens through which to view China.
Don’t forget Draghi
Chinese policy makers may have dominated the headlines over the summer but we shouldn’t forget just how significant the European Central Bank’s (ECB’s) own monetary policy measures – particularly its quantitative easing (QE) programme – are for European equities. At the ECB meeting earlier this month, ECB President Mario Draghi was surprisingly-focused on recent market volatility and lower demand from emerging markets, emphasising the ECB’s “willingness and ability to act, if warranted, by using all the instruments available within its mandate…the asset purchase programme provides sufficient flexibility in terms of adjusting the size, composition and duration of the programme”.
Alongside the announcement that the issue share limit of a country’s debt eligible for purchase as part of the already sizeable QE programme would be increased (up from 25 per cent to 33 per cent), such comments suggest the ECB will continue to do “whatever it takes” to support the Eurozone economy; good news for European stocks.
Though the primary objective of ECB QE is not necessarily to weaken the euro, the increased money supply injected to ward off deflation inevitably drives the currency lower, making exports from the region more competitive.
European recovery intact
While European data has been relatively strong, a slowdown in emerging markets should not be underestimated given European companies derive 31 per cent of their revenues from emerging markets (6.3 per cent from China). We’ve had an underweight exposure to companies which generate revenues in emerging markets for some time, favouring those companies able to access the domestic European recovery, which remains very much intact despite the recent market volatility. Domestic consumption in Europe looks resilient enough to offset slower growth elsewhere, the credit cycle has picked up (loan growth for both corporates and households looks robust) and there has been a resurgence in earnings.
In this environment, we believe with fundamental company analysis and a flexible management approach we can navigate the volatile market conditions and capture the best a recovering Europe has to offer – stock selection is crucial.
Nigel Bolton is head of European equities at Blackrock