China’s devaluation could hit European equities

The recent currency devaluation by China will have a limited direct impact on European equities but some sectors could be strongly affected, according to fund manager Schroders.

Schroders European equities fund manager, Martin Skanberg, said the recent renminbi devaluation by China could be driven by weaker fundamentals in the Chinese economy. “Slowing GDP growth is backed up by anecdotal company feedback which points to a considerable contraction in Chinese trade data, with export and import levels both meaningfully lower. As a result, global risk premia may need to adjust higher to reflect lower global growth,” Skanberg said, adding that this could see an acceleration of emerging market stress which is likely to continue to have a negative impact on commodities and energy prices. This could have a deflationary impact, which Skanberg said could be negative for European equities if it is associated with lower global growth. However, if it means that the ECB extends its QE programme, this could be a positive factor for European equities.

In terms of sectors, the luxury goods and automobile sectors have significant exposure to China, but many domestic industries do not. Consequently, Skanberg said he preferred European equities with a domestic focus, including banking, as well as insurance, media, utilities and telecoms among others.