China-exposed European Stocks Face Challenges Despite Stimulus, Says UBS

European stocks with exposure to China continue to face challenges, even after recent stimulus measures were introduced, according to strategists at UBS.

China has implemented additional monetary easing and capital injections aimed at stabilizing its economy; however, these actions are perceived as inadequate to significantly benefit European firms. Historically, while monetary policy has mitigated risks, UBS points out that it has not been effective in stimulating demand. A lack of substantial fiscal stimulus means that China’s economic recovery remains limited.

The report indicates that fiscal policy tends to influence business cycles more rapidly and can energize private sector activity, especially in a centrally managed economy like China. This dependence on government direction has created obstacles for the private sector, exacerbated by insufficient fiscal stimulus and ongoing regulatory pressures.

The current Chinese stimulus package aims to stabilize the property sector, which could provide some relief for European industries such as mining and industrials. Companies with ties to China’s real estate market might see minor advantages, but UBS maintains a cautious outlook on the broader effects on sectors such as luxury goods, semiconductors, and chemicals, which are not expected to gain significant support from these measures.

While there has been a slight uptick in China-exposed stocks in Europe—evident in a 4% increase over the past week—UBS believes this momentum is unlikely to persist. They caution against reliance on China exposure, highlighting that these stocks have underperformed by 12% in the previous two months. In contrast, European consumer stocks have shown stronger performance, benefitting from increased savings, rising real incomes, and sensitivity to interest rates, particularly in the UK and Scandinavian regions.

UBS also emphasizes that the Chinese economy is grappling with significant structural issues, such as excess capacity and an oversaturated real estate market, which continue to hinder growth. Despite the recent stimulus measures, UBS views them as iterative rather than transformative, suggesting that any benefits to European companies in the near term are likely to be modest and temporary.