Big Business With China Is No Longer a Penalty for These Company Stocks

HSBC USA CEO Burke on Investing in China
  • European companies get about 8% of revenue from China
  • Yum, Qualcomm, Adidas, Swatch among those that see benefit

Companies that do business with China have gone from pariahs to market darlings in less than half a year.

An index of firms in developed markets that get the most sales from the Asian nation, including Qualcomm Inc., Yum! Brands Inc. and mining giants Rio Tinto Group and BHP Billiton Ltd., has risen 33 percent since a low in February, outpacing global shares by the most in almost a year, data compiled by Bloomberg and MSCI Inc. show. That’s some recovery for a gauge that slumped as much as 35 percent in less than a year.

Signs that China’s economy is stabilizing have helped restore confidence in global companies tied to it. The effect is arguably amplified amid worries about the efficacy of central-bank stimulus from Europe to Japan, as well as concern that the fallout of British secession from the European Union will start to hurt economic growth.

“For the first time in ages, we’re actually getting positive surprises out of China,” said Thomas Thygesen, SEB AB’s head of cross-asset strategy in Copenhagen. “CEOs across the world are also telling us that things aren’t too bad over there. That has helped us reduce the fear of an imminent global recession.”

Morgan Stanley estimates European companies get about 8 percent of total revenue from China, while Japanese firms derive about 6.6 percent of sales from the country. For American companies, it’s 3 percent. Data have signaled China’s economy is responding to increased policy support, with gross domestic product rising a better-than-forecast 6.7 percent in the three months through June. China’s industrial production and retail sales for that month also exceeded projections, while the services industry improved in July.

That has boosted metal prices and shares of miners including BHP and Rio Tinto, just as updates from companies have signaled rising consumer spending in China.

Yum, the fast-food chain which is spinning off its Chinese business, said last month second-quarter sales grew 3 percent in the country and that both its Pizza Hut and KFC restaurants are off to a good start in the current period. Qualcomm, the biggest maker of semiconductors that run smartphones, said it’s been gaining market share in China and forecast profit and sales that may beat analyst estimates. Nissan Motor Co. predicted sales growth for its premium brand will pick up in the largest auto market, while Honda Motor Co. reported better-than-projected profit on higher demand in the U.S. and China.

Adidas AG, whose sales have soared in the country, last week increased its 2016 profit forecast for a fourth time this year. Swatch Group AG said it has seen a “clear improvement” in mainland China, especially for its higher-end watches. Volkswagen AG noted an increase in vehicle sales there in June, while Daimler AG predicted demand in that market will probably “recover significantly” this year.

Economic reports in the Asian nation are only just improving after trailing expectations for most of the past year. In 2015, global shares with China exposure tumbled 18 percent, versus a decline of just 2.7 percent in the MSCI World Index, as the country’s multiple currency devaluations sapped sentiment. EFG Bank’s Alex Neil says the current rebound won’t last, as stocks have been driven higher by speculation of central-bank support and are vulnerable to any let down by policy makers or economic data.

“China economic data isn’t great,” said Neil, head of equity and derivatives trading at EFG in Geneva. “My concern is that this won’t turn into a long-term trade, at least until Chinese and EM macro data can show a consistent uptick. By pushing equities up so much, investors are risking setting themselves up for a fall.”

The China effect is especially notable in Europe -- the only region where firms get the majority of their revenues from overseas. There, alternatives are few for global fund managers who are bailing out of the region’s equities at a record pace. A Morgan Stanley index tracking European companies that most rely on the U.S. rebounded about half as much as a China gauge from the Feb. 11 low through Monday, while another focused on euro-area sales gained just 5.2 percent.

“Many investors are bearish on Europe and are looking for the more global stocks,” said Christian Stocker, a strategist at UniCredit Bank AG in Munich. “There has been a relief coming from commodity-related stocks and that may end soon, but consumer-related stocks will offset it in the second half of the year.”

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