Finimize - 👛 Chinese consumers cut back

What’s going on here?

European companies have been striking a gloomy tone this earnings season, with Chinese consumers keeping their hands in their pockets.

What does this mean?

China’s economic slowdown doesn’t stop at the country’s borders: Europe is definitely feeling more sluggish as its top trading partner struggles. The region’s beloved luxury brands are selling fewer handbags, belts, and silks. Luxury parent LVMH – whose high-end babies include Louis Vuitton and Veuve Clicquot – made 14% less in sales in the second quarter as cautious consumers tightened their fancy purse strings. All of that’s a blow to profits, share prices, company valuations, and even jobs.

Why should I care?

Zooming out: Like a rolling stone.

Chinese authorities aren’t holding back: just this week, they slashed interest rates in hopes of giving the economy a boost. But critics say to get things rolling again, the government will need to flash its cash with some major stimulus. In the meantime, folks everywhere are feeling the pinch. Entire countries are bracing themselves, including Germany: the country’s goods make up half of the bloc’s China-bound exports. Individual companies are preparing for the worst too: Volkswagen, Standard Chartered Bank, and mining companies BHP Group and Rio Tinto rake in almost half their revenue from China. It seems no one’s safe, really, with Chinese firms looking to shift their dusty inventories to the West where there’s more demand – creating a problem for global manufacturers.

The bigger picture: There’s always a but.

Bucking the trend, though, are four of the world’s biggest chip equipment makers, which have seen their Chinese revenues take off since late 2022. But that gravy train won’t run forever, especially with the US harping on about even tighter regulations that could cut sales of advanced tech to China. So it seems that riding on China’s coattails and relying on its demand might truly be a thing of the past.

What’s going on here?

British business activity is starting to look downright sunny, with growing optimism about the country’s economic and political outlook.

What does this mean?

The UK’s official purchasing managers’ index checks the overall climate for private sector companies. And the latest look shows them shining: confidence is up, they’re hiring, and manufacturers are fielding new orders left, right, and center. The index rose to 52.7 in July – comfortably above the critical 50 level that separates the economic good times from the bad. That’s thanks to a little pickup in the services sector and a hefty improvement in manufacturing. And there were handshakes aplenty: new business increased and new jobs were started at their healthiest pace in over a year.

Why should I care?

For markets: Cheap as chips.

UK stocks have been stuck in a bit of a rut since 2016’s Brexit vote. But near-target inflation and some new political leadership have investors giving the country’s shares a second look. Big investing houses have been crowding into London’s mid-sized stocks like they’re the Tardis. But, after years of underperforming, they’re still pretty cheap – and so are Britain’s bigger fish investments. Of course, that could soon begin to change: attractive valuations and an economic recovery make for a pretty tasty recipe.

The bigger picture: Lessons from China.

With inflation seemingly back under control and interest rates expected to be slashed across most major economies this year, that should paint a brighter picture for global growth and stocks. But with geopolitical tensions, election uncertainties, and a still-struggling Chinese economy, it won’t all be sunshine and shortbread. In fact, if there’s one lesson to take from China now, it’s that low valuations aren’t everything. The country’s stocks are still trading super-cheap compared to other major markets – but with the outlook still so murky, even bargain hunters are keeping their distance.