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Goldman Says Sell European Stocks That Rely on China for Profits

(Bloomberg)

(Bloomberg) -- Investors should sell European stocks that derive the bulk of their sales from China due to sluggish consumption and heightened trade tension, Goldman Sachs Group Inc. strategists said.

The team, led by Lilia Peytavin, instead recommend buying companies with high exposure to the US — Novo Nordisk A/S and BP Plc are some of the leading names in that group.

The strategists warned of poor spending appetite in China, the country’s intention to tax luxury goods and the likelihood that Beijing would retaliate against the European Union’s tariff hike on electric-vehicle imports. As such, Goldman’s basket is mostly comprised of stocks in luxury, automotive, basic resources and semiconductor sectors.

“While a great deal of earnings downgrades have already occurred year-to-date for our luxury basket, we worry that more could take place,” Peytavin wrote in a Wednesday note. “Also, the valuation premium of the basket has deflated, but remains on the high side of its history.”

Some of Europe’s biggest firms count among those that Goldman is shorting. 

These include luxury firms LVMH and L’Oreal SA, which respectively derives 17% and 21% of their sales from China. The cosmetics manufacturer warned last month that it was expecting slower growth for the beauty market in 2024 due to weakness in China after years of strong growth.

Similarly, Mercedes-Benz Group AG has a 36% sales exposure to China, the highest among car European manufacturers. 

Meanwhile, better fortunes await firms with exposure to the US, the strategists said. 

With Donald Trump currently leading polls in the race for the White House, an outcome which is likely to benefit the dollar, the stocks in Goldman’s basket would likely gain if the US currency appreciates. The selection is largely made up of health care and media stocks, rendering them relatively defensive.

A company such as Novo, manufacturer of the weight-loss drug Ozempic, gets 59% of its revenues from the US. Other names include London-listed Pearson Plc and BAE Systems Plc.

This group “would likely do well in the event of tariff escalation, given the majority of its companies have direct operations in the US,” the strategists said.

The basket is trading near the lowest 12-month forward price-to-earnings premium to the Stoxx Europe 600 index since the global financial crisis, making the stocks relatively cheap, the strategists said.

“A stronger dollar, all else equal, is good for European companies with US exposure,” Peytavin said.

©2024 Bloomberg L.P.

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