At least 32 UK-listed companies have informed shareholders that they have been impacted by the slowdown in the Chinese economy, according to Bowmore Wealth Group. 12 of those issued profit warnings with the other 20 citing financial pressures from China’s economic downturn that fell short of a profit warning.
Companies including Aston Martin, Burberry, and Mulberry have reported lower profits due to the knock-on effects of weaker consumer demand and falling business confidence in China.
Growth in China has been slow due to falls in property prices, higher youth unemployment and a slowdown in the growth of urban incomes, which have put pressure on international firms with exposure to the Chinese market.
Whilst Bowmore advises caution due to China’s continued weak economic outlook after a tough four years, it also points out that Chinese shares are at their lowest valuation in nearly a decade last year, more than a 50% discount to the US* (a forward PE of 10 for Chinese shares vs 20 for US shares).
Because of the historically low valuations Bowmore says that investors could consider maintaining exposure to Chinese equities, especially as part of their efforts to have a good geographical diversification in their portfolio.
While the economy has slowed significantly, these conditions have already been reflected in share prices, meaning there may still be long-term opportunities for investors as the Chinese government is showing signs of continuing support to resolve this issue.
Jonathan Webster-Smith, Chief Investment Officer at Bowmore Asset Management, says: “China’s economic challenges are clearly having a significant impact on global markets, with UK companies among those affected. However, given China represents 18% of the world’s economy and is critical to world supply chains, it remains important for investors to retain some level of exposure.”
“Domestic demand in China is key (over 80% of GDP) and with saving rates remaining stubbornly high there is a possibility of a strong rebound if confidence can be restored.”
With increased government intervention and stimulus measures, Bowmore analysts anticipate a modest recovery which could result in some significant market upside.
Jonathan Webster-Smith adds: “With further government stimulus expected in China, following the latest $1.40 trillion package, we expect to see some recovery in the near term, while long-term prospects remain positive.”
US tariffs have now been imposed on China so many will be concerned about the effect this will have on the recovering economy. Bowmore have said the impact might be far less severe on Chinese economic growth than one might initially fear.
Jonathan Webster-Smith adds: “Chinese exports to the US account for just under 3% of Chinese GDP which, following the tariffs, is expected to translate into a manageable 1% overall reduction and a minor reduction in GDP of around 0.2%”
* Source: JPMorgan Guide to the Markets
