European Equities: A Door to China’s Reopening?

China’s Manufacturing Purchasing Managers Index, which provides an early indication of economic activity in the Chinese manufacturing sector, improved to 51.9 in March 2023 (the latest available reading), up from a recent low of 47.0 in December 2022 after nearly three years of China’s zero-COVID-19 policy. But China’s equities continue to play catch-up with other regional equity markets. The MSCI China Index, which has struggled since the onset of the COVID-19 pandemic in early 2020, returned 7.4% (gross USD return) between Dec. 30, 2022, and May 29, 2023. By comparison, the MSCI Emerging Markets Index returned 2.5% over the same period.

Could investors participate in China’s reopening other than by directly investing in China shares?

Using the MSCI Economic Exposure Data, we looked at European equity markets’ exposures to the Chinese economy. Historically, European companies have derived a meaningful share of revenues from emerging markets, and in particular, China. Within continental Europe, as of April 28, 2023, France and Germany had the highest economic exposure to China.

As of April 28, 2023, in France and Germany, the consumer discretionary sector — specifically, luxury goods — offered the highest exposure to China, but the industries making up the exposure differed. In France, the lead industry was consumer durables and apparel, for example, LVMH Moet Hennessy Louis Vuitton and Hermes International S.A. In Germany, the leader was the automobile and components industry, for example, BMW AG, Mercedes-Benz and Porsche AG.