(Bloomberg) -- It’s too early to go bargain hunting for European stocks with high exposure to China, according to Citigroup Inc. strategists, putting them at odds with counterparts at Bank of America Corp.
Beijing is more likely to keep implementing piecemeal policy stimulus rather than the major confidence-reviving measures that some investors are hoping for, strategists led by David Groman said in a note on Wednesday.
Luxury-goods makers, miners and carmakers are seeing sharper cuts to earnings expectations than the broader market — and that won’t change soon, the Citi strategists said in the report, which contrasted with last week’s Bank of America recommendation.
“We’re not yet buying into weakness among Europe’s China proxies,” the Citi strategists said. “China data remain weak, and major near-term stimulus is unlikely.”
Luxury stocks from LVMH to Kering SA tumbled this year as Chinese buyers curbed their spending. Carmakers Volvo Car AB and Porsche AG became popular targets for short sellers amid trade disputes between Europe and China. Miners Rio Tinto plc and Glencore plc have fallen more than 20% this year as a slump in China’s housing sector shows no signs of easing.
While these stocks have pulled back, their earnings momentum remains weak, the strategists said. As the US presidential race heats up, geopolitics are taking center stage with Donald Trump stoking fears of a trade war. That’s a major risk for assets sensitive to the Chinese economy.
Citi’s basket of European companies with high revenue exposure to China has fallen over 7% this year, a sharp divergence from the 6% gain seen for the Stoxx 600 benchmark.
To be sure, any positive surprises from Beijing could spark a rally for battered China-exposed shares, the strategists said.
A Bank of America team led by Sebastian Raedler said last week that a retreat in European luxury and semiconductor stocks may offer attractive entry points. They argued that China’s economy could re-accelerate in the next three quarters as the credit cycle becomes more supportive.
--With assistance from Sagarika Jaisinghani.
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