Goldman Sachs strategists have suggested that investors sell most of their European stocks that rely heavily on the Chinese market due to weak consumption in China and escalating trade tensions between China and Europe.
Led by Lilia Peytavin, the team warned that with China’s weakening consumer sentiment and plans to impose taxes on luxury goods, the Chinese government may retaliate against the EU by increasing import tariffs on electric cars, putting Goldman’s investment portfolio at risk, which mainly consists of stocks from the luxury, automotive, basic resources, and semiconductor industries.
Peytavin wrote in a statement on Wednesday (July 10th), “Although our luxury investment portfolio has experienced several profit downgrades since the beginning of the year, we are concerned that there may be more downgrades ahead; in addition, the valuation premium of this investment portfolio has already narrowed, although it remains at historical highs.”
Among the European companies that Goldman Sachs is betting against are some of the largest, including luxury goods companies such as LVMH and L’Oreal SA, which derive 17% and 21% of their sales, respectively, from China. L’Oreal warned last month that with the softening of the Chinese market after years of strong growth, the growth of the beauty market in 2024 is expected to slow down.
In the automotive sector, Mercedes-Benz Group’s sales from China account for 36%, the highest among European automakers.
Goldman Sachs strategists also noted that companies doing business in the US are likely to prosper. They recommend investors buy into companies whose revenue mainly comes from the US, with Novo Nordisk A/S and BP Plc being top choices.
They further stated that Donald Trump’s currently leading trend in presidential election polls is likely to benefit the US dollar. In the event of a stronger dollar, stocks in their portfolio that are likely to rise include those mainly in the healthcare and media sectors, making them relatively defensive.
Companies like Novo Nordisk, the manufacturer of the weight-loss drug Ozempic, generate 59% of their revenue from the US. The strategists said, “If tariffs escalate, the group may perform well as most of its companies have direct operations in the US.” Peytavin added, “Under unchanged conditions, a stronger dollar is advantageous for European companies with US operations.”
Other recommended stocks by Goldman Sachs include London-listed Pearson Plc and BAE Systems Plc.
Goldman Sachs strategists mentioned that the 12-month forward price-to-earnings ratio of their stock basket is currently trading at a discount compared to the Stoxx Europe 600 index, nearing the lowest level since the global financial crisis, making them relatively cheap.
In an interview with Bloomberg TV on March 4th this year, Sharmin Mossavar-Rahmani, Chief Investment Officer at Goldman Sachs Wealth Management, said, “All of our clients are asking this question – given that China (stocks) look so cheap, people are inevitably saying, has it already bottomed out? Our view is, do not invest in China.”
She cited expectations of a steady slowdown in the Chinese economy over the next decade as one of the reasons. She mentioned that so far, China’s three economic pillars – the real estate market, infrastructure construction, and exports – have all shown signs of weakness, coupled with unclear policy-making by the CCP and inconsistent economic data, intensifying concerns among investors regarding investing in China.
In recent months, tensions in China-Europe trade have been escalating. On July 5th, as the temporary tariffs imposed by the European Commission on Chinese electric car imports took effect, Beijing announced further actions on anti-dumping investigations on European imported brandy. Companies under Pernod Ricard’s flagship brands such as Martell, Remy Cointreau’s Remy Martin, and LVMH’s Hennessy received subpoenas overnight to attend a hearing in Beijing.
The Chinese Ministry of Commerce stated that a hearing would be held on July 18th to discuss the investigation into European brandy producers allegedly selling brandy to China below market prices.
In January this year, China began an anti-dumping investigation on European imported brandy, claiming that European brandy producers were selling below-market prices to China. In June, a second investigation was launched on pork imports from the 27 EU countries. Analysts believe that China’s choices of brandy and pork are aimed at pressuring countries like France and Spain to lobby the European Commission to cease imposing tariffs.
(Adapted from reports by Bloomberg)