With China Evergrande seen on the verge of collapse, with a default “inevitable”, broker Liberum screened for stocks in the UK and Europe with the largest revenue exposure to China and Asian markets for potential winners and losers from the resulting fallout.
“Given the large amount of debt issued by the company, fears about a spread of the crisis to other property developers in China and eventually the financial system in the country are justifiable,” said strategist Joachim Klement.
However, he expects the Chinese government and the central bank to follow the template of the LTCM hedge fund in 1998, which would result in China Evergrande being allowed to collapse “with the most profitable parts of its business bought up by rivals and the debt underwritten by either the PBOC directly, or by a consortium of Chinese commercial banks with the help of a liquidity injection” by the People’s Bank of China.
“In this base case the collapse of China Evergrande should merely lead to short-term setbacks in stock markets but not a lasting effect throughout 2022.
“Thus, these setbacks could be used to accumulate stocks at more attractive valuations and we screen for stocks in the UK and Europe with the largest revenue exposure to China and Asian markets.”
Klement and his colleagues put the chance of a disorderly default at less than 10%, with the risk of it becoming a financial crisis in China below 5%.
An adverse scenario with a disorderly default of Evergrande but its debts are guaranteed to prevent a financial crisis, the analysts would envisage local GDP growth declining 4% and the shock to developed countries would be in the order of 1% to 1.5% and to the United States in the order of 0.5% to 0.6%. The prices of oil and other commodities would be most affected, with oil prices expected to drop by more than 30% and prices for iron ore, aluminium and copper to possibly drop even more.
In a ‘severely adverse’ scenario, a disorderly default of Evergrande’s debt and with no bailout for the bondholders, he would expect the default of at least one major internationally linked bank or insurance company, “creating international contagion through financial linkages” and an 8% decline in Chinese GDP and “a similar shock as the US and Western Europe did during the global financial crisis of 2008”.
Taking a European investor-centric view of the potential fallout, the analysts have screened the companies in the FTSE All-Share index for their geographical revenue exposure to China, though most companies do not disclose their revenues from China alone but rather include revenues from Asia Pacific and other regional aggregates.
“Next to the mining companies, we note that both Prudential and HSBC have large exposure to Chinese and Asian markets in general and are particularly at risk from a potential local financial crisis,” Klement said.
Companies and China exposure
The analysts also noted that construction materials, industrials and, to a lesser extent, industrial support services, are the sectors most directly exposed to the Chinese construction market, though none of the UK contractors and construction company have any exposure to China – though some industrials and support services companies have substantial revenues in Asia and China.
If a company is not in the list below, it has not disclosed any revenues from Asia.
China/Asia exposure of UK industrials and support services companies
European companies exposure to China
- ASM International 64%
- ams Technology 63%
- Richemont 53%
- Umicore Chemicals 51%
- Delivery Hero (ETR:DHER, OTCQX:DLVHF) 48%
- Kone 41%
- Kering 7%
- Merck KGaA 36%
- SGS 36%
- BE Semiconductor 35%
- Christian Dior 34%
- LVMH 34%
- Elekta 34%
- Wartsila 34%
- adidas 33%
- Valeo 33%
- Georg Fischer 31%
- SKF 31%
- Schneider Electric 30%
- Carlsberg 29%
- Hexagon 28%
- Puma 28%
- Schindler Holding 28%
- Arkema (OTC:ARKAY) 27%
- BASF 25%
- Valmet 25%
- ANDRITZ 25%