Will surprisingly solid Chinese GDP numbers lift Standard Chartered plc, Prudential plc and Burberry Group plc?
China’s headline GDP growth rate of 6.7% in Q2 may have been the same as the previous three-month period, but there were signs of potential good times on the horizon for some of the UK’s largest companies. Most important, besides growth stabilising, was that the portion of growth attributed to consumption rose to 4.9% out of the 6.7%. This is a sign that the economy’s shift towards the service sector is bearing fruit. Second, retail spending rose 10.6% year-on-year, a great sign for UK companies exporting higher-end goods to the country.
Unfortunately none of this will likely translate to a significant boost to the bottom line of Standard Chartered (LSE: STAN). The emerging markets-focused lender brought in 33% of operating income from Greater China and it remains by far the bank’s largest market.
However, like it did across the developing world, Standard Chartered extended too many iffy loans during the boom years of infrastructure-led growth and is now paying the price. Underlying profits from China dropped 27% last year as the company wrote-off bad loans, lowered lending due to falling demand and emphasised a greater focus on providing higher quality loans.
The bad news from China’s Q2 results for Standard Chartered is that manufacturing remains in the doldrums, threatening more loan impairments in the near future. That said, while these figures may not help the bank in the short term, over the long term the company’s retail banking and wealth management divisions will certainly benefit from a stronger service sector and higher consumer demand for credit and banking services.
Another company chomping at the bit for a larger Chinese middle class is insurer Prudential (LSE: PRU). Its China operations are booming as wealthier consumers buy life insurance for the first time and the Chinese government rapidly expands both public and private social safety nets. These factors led to insurance premium sales rising 29% last year on the mainland and 74% in Hong Kong, where many mainland residents park part of their wealth.
Despite increased regional market volatility last year led by China’s up and down bourses, Prudential’s Asian asset management business still enjoyed net inflows of £6bn annually. As China’s services sector grows and more consumers become retail investors this positive trend doesn’t appear close to slowing down. Considering Prudential’s strong business in the US and growth potential in China, the shares are worth a closer look trading at 11 times forward earnings and offering a 3% yield.
Room for improvement
If any company needs good news out of China it’s luxury retailer Burberry (LSE: BRBY), whose shares are down 20% over the past year largely due to falling Chinese consumption. Burberry’s Q1 results didn’t break out precise numbers, but warned of a “double-digit percentage decline in comparable sales” in Hong Kong, where many Chinese customers buy their luxury goods.
These woes and flat revenue on a constancy currency basis led to CEO and creative chief Christopher Bailey losing the CEO post, which should hopefully reinvigorate both creative and financial sides of the company. Burberry should also benefit from a weaker pound as around half of sales across Europe are made by tourists, who will now find the UK a cheaper location for their shopping spree. If Chinese consumer confidence continues to grow alongside the country’s stock market valuations Burberry’s results could improve dramatically in the coming quarters.
These five companies offer the stable dividends that come from operations across North America and Europe but also the growth potential of substantial exposure to Asia, Africa and Latin America.
To discover how this combination has made each company a great long-term investment, simply follow this link for your free, no obligation copy of the report.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
China?s headline GDP growth rate of 6.7% in Q2 may have been the same as the previous three-month period, but there were signs of potential good times on the horizon for some of the UK?s largest companies. Most important, besides growth stabilising, was that the portion of growth attributed to consumption rose to 4.9% out of the 6.7%. This is a sign that the economy?s shift towards the service sector is bearing fruit. Second, retail spending rose 10.6% year-on-year, a great sign for UK companies exporting higher-end goods to the country.
Unfortunately none of this will likely translate to a significant…