Europe’s China-reliant sectors surge as stimulus fuels optimism

Miners, luxury goods makers, automobile manufacturers and financial firms notched gains. Miner Anglo American Plc, Gucci-owner Kering SA and insurer Prudential Plc were among the top performers in the Stoxx Europe 600 Index, all rising by around 5%.

China’s sluggish economy has been a concern for investors, given the influence of its consumers on demand for goods spanning pricey cognacs to luxury vehicles. The second-quarter earnings season was marred by a string of profit warnings as a slowdown in the economic giant hit companies’ bottom lines.

“The new stimulus package by the Chinese authorities should help boost export demand for European companies,” said Joachim Klement, head of strategy, economics and ESG at Panmure Liberum. However, Klement questioned whether the measures would ultimately be enough to create a sustained recovery.

Bloomberg

German automakers remain heavily exposed to China’s downturn. Just this month, BMW AG and Mercedes-Benz Group AG slashed profit forecasts, sending shares in both tumbling. The two companies said the country’s protracted real estate crisis is weighing on consumer spending decisions. Both stocks were higher Tuesday.

The property troubles have dragged down metal prices. Iron ore, the biggest driver of profits for miners, has been among the worst-performing commodities this year, leading steel mills to curb output. Futures jumped more than 5% on Tuesday, while copper and aluminum also advanced. Shares of BHP Group, Rio Tinto Group and Glencore Plc all gained at least 4% following Beijing’s package to shore up the real estate sector. Luxury fashion groups LVMH and Hermes International SA, as well as premium distillers Diageo Plc and Pernod Ricard SA, have keenly felt the impact of weaker consumer demand in China. Analysts have been growing more bearish on the sector as a demand recovery remains elusive.“Consumer and industrial firms in Europe have been dealing with a double-whammy of weaker demand, both from inside Europe and from China. So, these measures at least help to alleviate some part of that problem,” said Michael Field, European market strategist at Morningstar.

Whether the package will be enough to help turn the economy around is debatable, Field added, noting already-low interest rates leave the People’s Bank of China with less room to maneuver.

“We have been there before, but given how depressed sentiment /positioning is on China exposure, latest stimulus headlines may provide a lift to the space, at least short-term,” said Emmanuel Cau, head of European equity strategy at Barclays, in written comments.