# Analysis-Investors’ route to post-COVID China is via Europe Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2023-05-10 Category: INVESTING Category URL: https://financedigest.com/category/investing Meta Title: Investors Opt for European Companies for Post-COVID China Meta Description: Investors finding more value in buying European companies with China focus versus Chinese companies directly. See why in this insightful analysis. URL: https://financedigest.com/analysis-investors-route-to-post-covid-china-is-via-europehtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2023-05-10t155055z2lynxmpej4906drtroptp4europe-stocks-china-analysis-1736814037335-compressed.jpg) # Analysis-Investors’ route to post-COVID China is via Europe By Alun John and Ankur Banerjee LONDON/SINGAPORE (Reuters) – Investors are getting more bang for their buck this year by buying European companies with a focus on China than buying Chinese companies themselves, a sign of the unevenness of China’s pandemic recovery and geopolitical concerns. Late last year, China dismantled its strict zero-COVID policy, helping its economy rebound by a faster-than-expected 4.5% in the first quarter of 2023. The recovery has been patchy, however. Pent-up consumer demand has boosted the [services sector](https://www.financedigest.com/protecting-the-uk-financial-services-sector-from-cyberattacks-now-and-in-2023.html "Protecting the UK financial services sector from cyberattacks now and in 2023"), but manufacturing has lagged. Property and tech have been bruised by regulatory crack-downs, indebted local [governments have little spare cash to spend](https://www.financedigest.com/growth-will-pay-for-uk-government-spending-plans-minister-says.html "Growth will pay for UK government spending plans, minister says"), and youth unemployment is well above the national average. “Certainly people are spending, the consumption side is real. But there is not much more beyond that,” Geoff Yu, senior EMEA market strategist at [BNY Mellon](https://www.financedigest.com/bny-mellons-new-solution-leads-the-digital-bill-pay-revolution.html "BNY Mellon’s New Solution Leads the Digital Bill-Pay Revolution"), said. Investors must now hunt for more nuanced ways to trade [China’s post-COVID](https://www.financedigest.com/budweiser-apac-bets-on-post-covid-china-thirst-for-premium-beer.html "Budweiser APAC bets on post-COVID China thirst for premium beer") economy. We are looking into ways to express this ( [China recovery) theme in our portfolio rather than just say ‘let’s go long China equity’](https://www.financedigest.com/china-equities-weigh-as-em-sees-another-month-of-outflows-iif.html "China, equities weigh as EM sees another month of outflows – IIF"). That trade is too simple, and there are a lot of uncertainties,” said Wang Taosha, Fidelity portfolio manager. The old playbook, where Chinese recoveries were associated with a rebound in construction and housing, is not necessarily the case this time, and obviously there is the geopolitical overhang and the previous rounds of domestic regulatory reforms that were [applied to the tech](https://www.financedigest.com/techie-turn-offs-top-7-things-that-put-talent-off-applying-for-tech-roles.html "Techie turn-offs: Top 7 things that put talent off applying for tech roles") and education sector. Wang is positive on China, but her preferred route is via the luxury sector, mainly due to the savings built up during the pandemic, particularly by the wealthy, and [pent-up demand for travel](https://www.financedigest.com/pent-up-demand-prompts-european-travel-recovery-as-covid-curbs-ease.html "Pent-up demand prompts European travel recovery as COVID curbs ease"). Many potential beneficiaries are listed in Europe, where nearly 2% of [euro zone](https://www.financedigest.com/euro-zone-yields-fall-as-us-payrolls-seen-easing-rate-hike-pressure.html "Euro zone yields fall as US payrolls seen easing rate-hike pressure") GDP is exposed to China, compared with just over 0.5% for the U.S., according to Barclays. [Europe’s STOXX](https://www.financedigest.com/telecom-italia-tops-europes-stoxx-600-amid-spiking-covid-19-cases.html "Telecom Italia tops Europe’s STOXX 600 amid spiking COVID-19 cases") 600 index is up around 10% year-to-date, outperforming most other major indices. A milder winter that helped [cut energy](https://www.financedigest.com/uk-will-not-urge-public-to-cut-energy-use-minister-says.html "UK will not urge public to cut energy use, minister says") costs has also helped drive it towards 14-month highs. China’s onshore blue-chip index is up 5% this year. But a “Shadow China” basket, calculated by Jefferies, which includes [European companies](https://www.financedigest.com/factbox-what-european-companies-are-doing-as-workers-face-high-inflation.html "Factbox-What European companies are doing as workers face high inflation") that derive over 10% of their revenues from China, has risen 33% since the start of November – roughly when China began reopening – outperforming MSCI’s index of developed European markets by 5.3%. One beneficiary is LVMH, the first European company to top $500 [billion in market value](https://www.financedigest.com/sulphur-recovery-technology-market-value-to-grow-by-almost-1-2-billion-during-2021-2031.html "Sulphur Recovery Technology Market Value to Grow by Almost .2 Billion During 2021-2031"), with management flagging China’s reopening as a major driver of both its recent growth and expansion plans. Given the higher risk premium of China [stocks](https://www.financedigest.com/mutual-funds-vs-stocks-which-is-better.html "stocks"), the demand for ‘shadowing’ China will continue to be strong,” Jefferies said. ![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/pasted-image-1683635591360-1736814037951-compressed.jpg) Shadow China starting to outperform MSCI China, https://fingfx.thomsonreuters.com/gfx/mkt/klvygllrwvg/Pasted%20image%201683635591360.png GEOPOLITICS AND [BARGAIN HUNTING](https://www.financedigest.com/european-stocks-rise-on-bargain-hunting-erase-weekly-losses.html "European stocks rise on bargain-hunting, erase weekly losses") One reason why people go for indirect exposure to China, so through the [European market](https://www.financedigest.com/white-bullets-collaboration-with-polands-sygnal-association-significantly-reduces-ad-funded-piracy-in-key-european-market.html "White Bullet’s collaboration with Poland’s Sygnał Association significantly reduces ad-funded piracy in key European market"), is to manage the geopolitical risk,” said Emmanuel Cau, Barclays head of European equity strategy. If you go straight to China, you have more risk than going indirectly (through Europe), where you have [liquidity and can be in and out of the market](https://www.financedigest.com/liquid-smoke-market-growth-future-prospects-and-competitive-analysis-2022-to-2032.html "Liquid Smoke Market Growth, Future Prospects And Competitive Analysis 2022 to 2032") as quickly as you want. China’s increased focus on [data security](https://www.financedigest.com/normalizing-advanced-cloud-data-security-with-normalyze-from-amer-deeba-and-ravi-ithal.html "Normalizing Advanced Cloud Data Security with Normalyze from Amer Deeba and Ravi Ithal"), which restricted overseas customers’ access to business data, has included raids on consulting and due diligence firms’ offices and has only added to those concerns. The relative cheapness of [European stocks](https://www.financedigest.com/european-stocks-rally-for-fifth-day-as-defensives-miners-climb.html "European stocks rally for fifth day as defensives, miners climb"), at least at the start of this year, has also been important. LVMH, obviously, had very good [results but it’s trading on a 33 times multiple](https://www.financedigest.com/how-to-juggle-multiple-software-projects-with-great-results.html "How to juggle multiple software projects with great results"). The mainland retailers in China, which don’t own the brands, are trading on 70 times multiple,” said James Cook, [head of investment](https://www.financedigest.com/mg-appoints-former-head-of-axa-investment-managers-andrea-rossi-as-new-ceo.html "M&G appoints former head of AXA Investment Managers Andrea Rossi as new CEO") specialists at Federated Hermes. We own (Swiss [watch company](https://www.financedigest.com/7-cyber-threats-fintech-companies-should-watch-out-for.html "7 Cyber Threats FinTech Companies Should Watch Out For")) Swatch. That is a sort of an [innovative way](https://www.financedigest.com/four-innovative-ways-to-pay-for-products-online.html "Four Innovative Ways to Pay for Products Online") of playing the resurgence in luxury consumption in China, but it is also a discounted way of playing that. Chinese [blue chips](https://www.financedigest.com/siemens-energy-to-rejoin-germanys-blue-chip-dax-hellofresh-to-exit.html "Siemens Energy to rejoin Germany’s blue-chip DAX, HelloFresh to exit") trade at a price-to-earnings ratio of nearly 30, compared to just 13.5 for the STOXX 600, according to Refinitiv data. But it’s not a simple case of [“buy Europe”](https://www.financedigest.com/credit-agricole-and-caceis-to-buy-rbc-investor-services-europe-unit.html "Credit Agricole and CACEIS to buy RBC Investor Services’ Europe unit"). Luxury stocks – less vulnerable to sanctions – have performed well, but geopolitical worries have bruised tech firms, and manufacturing difficulties have hurt commodity stocks. Even some consumer goods firms have faced headwinds. Adidas’ first quarter results last week showed the company struggling to maintain [market share](https://www.financedigest.com/world-u-s-share-markets-come-under-pressure-as-delta-economic-worries-mount.html "World, U.S. share markets come under pressure as Delta, economic worries mount"), though its management said the Chinese market is improving. You had to buy the right [China exposure,”](https://www.financedigest.com/exclusive-china-regulator-launches-new-probe-into-banks-property-loan-exposure-sources.html "Exclusive-China regulator launches new probe into banks’ property loan exposure – sources") said Barclays’ Cau. What is doing extremely well this year is luxury; if you’d bought [European miners hoping that China](https://www.financedigest.com/european-shares-rally-as-china-stimulus-lifts-recovery-hopes.html "European shares rally as China stimulus lifts recovery hopes") would stimulate, you’d have got it wrong. ![](https://www.globalbankingandfinance.com/wp-content/uploads/2023/05/124.jpg) Lap of luxury, https://www.reuters.com/graphics/EUROPE-LUXURY/lbpggyyxdpq/chart.png (Reporting by Alun John in London and Ankur Bannerjee in Singapore, editing by Amanda Cooper and Sharon Singleton) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---