China-exposed European stocks remain under pressure despite recent stimulus measures, UBS strategists said in a Wednesday note.
While China announced additional monetary easing and capital injections to stabilize its economy, these efforts are seen as insufficient to generate substantial benefits for European companies.
Although the monetary policy has historically helped reduce risks, it has been less effective at stimulating demand, UBS notes. Without significant fiscal stimulus, China’s recovery remains constrained.
“Fiscal policy is usually more quickly able to turn business cycles and to ignite the animal spirits of the private sector. We think this is particularly the case in a more centrally controlled economy like China,” strategists wrote in the note.
“The private sector has long known that it should follow the lead of the government. A lack of fiscal stimulus and continued government pressure on parts of the private sector remain strong headwinds to a more meaningful recovery in China, in our view.”
Still, the Chinese stimulus package focuses on stabilizing the property sector, which may offer some relief to European industries like mining and industrials.
Companies such as BHP, Rio Tinto (NYSE:RIO), Schindler, and Kone, with exposure to China’s real estate market, might see limited benefits. However, UBS remains cautious about the broader impact on sectors like luxury goods, semiconductors, and chemicals, which are unlikely to experience meaningful support from the current measures.
Strategists highlight that while there has been a modest rebound in China-exposed stocks in Europe, with a 4% increase over the past week, this is viewed as unlikely to continue.
“Stay cautious on China exposure,” UBS advises, noting that China-exposed stocks have underperformed by 12% in the past two months. Meanwhile, European consumer stocks have outperformed, driven by high Covid savings, improving real incomes, and sensitivity to interest rates, particularly in the UK and Scandinavia.
UBS underscores that the Chinese economy faces deep structural challenges, including excess capacity and overbuilt real estate, which continue to weigh on growth.
Despite the recent stimulus, UBS believes the measures are “iterative rather than transformative,” suggesting only modest benefits for European companies in the near term. “Any benefits to European companies at all may be modest and fleeting,” it added.