Every day new figures show how China is slowing. Manufacturing, imports, exports, inflation, bad debt: all the numbers are pointing in the wrong direction. Investors who seek solace in the fact that this may trigger another Chinese stimulus blitz should remember that easy money has less and less traction. China is hurting, and the FTSE 100 is feeling its pain.
Time and again when I review stocks for The Motley Fool, I see the impact China is having at an individual company level. Fashion retailer Burberry is the latest to feel the squeeze. Its shares fell 13% on Thursday morning as its poor Chinese performance rattled investors. It didn’t help that Burberry posted strong sales growth in North America, Europe and Japan, China blighted all. The mainland government’s crackdown on excess has hit sales of luxury goods and even a 2% rise in underlying Q2 sales to £774m didn’t avert the rout.
Bank Blitz
China has claimed far larger victims. Like UK-listed banks HSBC Holdings and Standard Chartered, which do around 75% and 90% of their business in emerging markets respectively, primarily China and Asia. At 519p, HSBC is 21% down on its 52-week high. Given that it single-handedly makes up more than 6% of the FTSE 100, this has quite an impact on overall index performance. The fall is even more dramatic at Standard Chartered: at 745p its share price is 36% off its year high.
HSBC’s strategy of pivoting to Asia could hardly come at a worse time. The slowdown in China will affect the rest of the region. At least HSBC still yields 6.12%. Standard Chartered has scrapped its dividend.
Commodity Crash
The damage inflicted by slowing China can be felt across the oil and commodity sectors, which make up 11% and 5% of the FTSE 100 respectively. In the last six months BP and Royal Dutch Shell are down 20% and 16% respectively.Falling Chinese demand isn’t entirely to blame, oversupply is also a factor, but it certainly doesn’t help.
Slowing Chinese demand for metals and minerals has savaged FTSE 100 mining giants BHP Billiton and Rio Tinto, as well as Antofagasta, Anglo American, and of course Glencore. Since 2012 it has driven 14 commodity stocks out of the FTSE 100 altogether, including Amec, Cairn Energy, Evraz, Kazakhmys, Lonmin, Petrofac, Tullow Oil and Weir.
Reckitt Ralphs
Household goods giants Reckitt Benckiser and Unilever are rare exceptions: Chinese consumers are still buying cleaning and beauty products.
We can’t blame China for everything, but when the world’s second biggest economy catches a cold, UK PLC can’t help but sneeze. Pretty much all the affected companies are responding in the same way, scaling back capital expenditure, slashing hundreds of millions off costs, shelving developments, and in some cases dropping their dividends. This has a negative impact on UK business confidence and growth.
FTSE 100 companies generate 77% of their earnings overseas, an increasingly large part of that from emerging markets, which makes the index vulnerable to events elsewhere. No wonder it is trading at roughly the same level it was 12 months ago. More bad news from China will spell bad news for the FTSE 100 as well.
