With world trade shrinking during the last quarter of 2018 and (possibly) the first quarter of 2019, the most trade-dependent economies have suffered the most.
China is not among these, I noted last week; exports comprised 36% of its GDP a decade ago versus only 18% today. China’s internal market is large enough to replace demand lost to exports. Monetary and fiscal stimulus have kept China on track for 6.5% GDP growth this year. That implies some recovery in Chinese imports, and a corresponding recovery among its trading partners, notably Europe.
Buoyancy in China’s economy is reflected in the sharp recovery of Chinese equity prices, which have risen by 50% on the China MSCI Index (investible large-cap stocks) since January 2017, when Donald Trump took office. The S&P 500, by contrast, has risen 30%. The threat of trade war provoked a plunge in Chinese stocks during 2018, before they bounced back in 2019.
Europe was the biggest gainer in China trade between 2014 and the end of 2019, as the chart makes clear, and showed the largest drop. As of March, European exports to China had fallen 25% year-on-year. That drop helps explain contraction in European manufacturing.
As China’s growth picks up, so will its imports from Europe, as well as the operations of European companies inside China.
Union Bank of Switzerland Data Lab economists wrote in an April 10 note to clients:
“The data for March suggests a strong recovery from January and February economic slowdown. We observe a reasonable growth pick up in exports, industrial production, and property sales. The overall China economic growth signal for March is much higher than Jan+Feb. Historical analysis suggests that monthly Chinese economic acceleration (deceleration) on average is associated with a rise (fall) in the corresponding risk asset prices during the course of the subsequent month when the economic data is announced. This month, the change in economic growth is strongly positive.”
European firms with a strong presence in China or a high proportion of revenues from exports to China should see a significant improvement in sales. Automakers are a high beta choice: Chinese auto sales are down 10% over the past year, and a return to stronger economic growth should release pent-up demand. Among the most-exposed companies to China are Germany’s big three automakers (Volkswagen, Daimler and BMW), as well as Italy’s Pirelli.0
Capital goods exporters like Schneider Electric, Siemens, Inmarsat, ABB, NP Semiconductors and Infineon should benefit from higher Chinese capital spending. And Airbus’ sales to China should increase both due to growth and due to Boeing’s 737 Max woes.
Ericsson and Nokia, the only major providers of 5G networks after China’s Huawei, should benefit from the global rollout of the next generation of mobile broadband.
I particularly like Volkswagen at just 5.5 times projected earnings, compared to Great Wall Auto at 10 times projected earnings. VW is China’s most popular nameplate with a forty-year history in the country; half its sales and most of its growth are in China. The company went through a rough patch due to the emissions scandal and global overcapacity, but is poised to benefit from the fastest-growing and largest auto market in the world. VW reportedly wants to buy out its Chinese joint-venture partner under new rules that allow foreign automakers to own 100% of their Chinese subsidiaries.