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What Luxury Stocks Are Saying About the New Cold War

Iput it in European interests follow the United States into the Taiwan conflict? French President Emmanuel Macron’s hints may not provoke anger on both sides of the Atlantic. But many French business leaders would quietly agree with Macron’s intention: to defuse tensions between China and the West. After all, the French stock market hit a record high on April 12, with strong Chinese demand being the most obvious reason.

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LVMHa luxury goods giant, is France’s largest stock cac 40 index, accounting for 13% of the market capitalization. On April 12, the company reported first-quarter sales growth of 17% year over year. Luxury brands such as Hermès International, Kering Group and Pernod Ricard also accounted for 8%. These companies not only make money from Chinese stores, but also from Chinese tourists in Europe. All have greatly benefited from the end of the Chinese government’s zero-coronavirus approach.

If France’s Chinese stocks are performing uniquely, it will be thanks to Mr Macron’s stance. But if you look at the valuations of stock markets in developed countries, you would never know that the relationship between China and the West is at a 50-year low.this Master of Science The World China Exposure index, which tracks 50 companies with high revenues in China, is up 7% this year — as much as developed-world stocks as a whole and outpacing a modest 3% gain in developed countries. Master of Science China index. Over the past five years, as relations between China and the West have deteriorated, China-oriented developed-world stocks have returned 16% annualized, compared with 9% for developed-world stocks overall and -4% for Chinese stocks .

This partly reflects concrete reality. No matter what happens to diplomatic relations, wealthy Chinese consumers are unlikely to stop buying handbags.Some companies with a lot of business in China, including BHP Billiton Both mining companies, the group and Rio Tinto, have weathered geopolitical disputes. While the Chinese government can adjust its commodity sourcing, as evidenced by the recent short-term ban on Australian coal, such adjustments are ultimately limited by the commodities the country must import.

The top three companies in the China Risk Index are Qualcomm, Texas Instruments and Broadcom. Not only do these three U.S. companies derive between one-third and two-thirds of their revenue from China, but they are all semiconductor companies operating precisely where advanced technology disputes are likely to be most intense. Their shares have seen double-digit percentage gains this year.they are also beating Second&p The US Large Companies 500 Index, and has performed very comfortably over the past five years.

Substantial net profit margins between 27% and 44% are a big part of the success of these three companies, well above the 11% margin Second&p Overall 500. Semiconductor companies will also benefit from support now being offered by Western governments to entice them to build factories closer to home. However, if the worst happens and companies have to leave China, offsetting such a large revenue share will require a huge new source of demand. What’s more, only Texas Instruments is the physical manufacturer of the chips — the kind of company most likely to benefit from the subsidy.

These companies will be at the top of the list should U.S.-China relations deteriorate. If they plan on life after leaving China, they do a good job of covering it up. Last month, Texas Instruments (TI) stepped up its commitment to invest in the country. Qualcomm has partnerships with telecom giant China Mobile and various Chinese handset makers.

The surprisingly strong performance of Western companies with operations in China suggests two things. First, even with the threat of conflict, foreign companies with a presence in China are still a better way to benefit from China’s economic growth than the Chinese stock market, which is hostile to state-owned enterprises and debt-laden real estate developers. heavy burden. Despite the country’s rapid economic growth, the stock market is still a third below its level at the end of 2007.

Second, the gap between security hawks and dovish global investors will only grow wider. It’s hard to find any discounts for companies with huge revenues in China. Investors don’t believe, or don’t want to believe, that companies with significant presence in China and the West will face problems. One of two perspectives – the increasingly bleak outlook for diplomats, or the optimism of investors – will prove dead wrong.

Learn more from our financial markets columnist Buttonwood:
Stocks have shrugged off the turmoil in the banking sector. isn’t it? (April 5)
Did social media spark a bank panic? (March 30)
Why Markets Can Never Be Truly Safe (March 23)

Plus: How the Buttonwood column got its name

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