US and European companies attributed disappointing earnings to a slower-than-expected economic recovery in China after its abrupt reopening after the pandemic prompted overly optimistic growth forecasts.
Cosmetic group Estee Lauder was the most high-profile example this week, suffering the steepest one-day share price drop on record after trimming its sales forecast on a much more volatile “. . . and more gradual” recovery in Asia than expected.
It was one of a growing number of companies, from consumer-focused chains like Starbucks to big tech groups and logistics firms, all noted for caution over the past couple of weeks.
“The general expectation was that, after reopening, the Chinese market would recover,” Qualcomm Chief Executive Officer Cristiano Renno Amon told analysts Wednesday. “We haven’t seen those marks yet.”
Qualcomm’s rival and one-off takeover target, NXP Semiconductors, issued a similar warning the previous day, noting that “it’s too early” to talk about a China recovery. “We have seen a modest and gradual improvement. . . from a very slow start,” said managing director Kurt Sievers.
Several consumer-facing groups have also warned about the pace of the recovery, particularly those who, like Estée Lauder, rely on travel expenses.
Hilton boss Christopher Nassetta said: “China will not make the contribution I would have hoped for this year.”
Finnair, meanwhile, noted that the recovery was “slower to begin with than many expected, while Colgate-Palmolive said, ‘We haven’t seen the travel retail business come back yet.’
Some companies have been more optimistic. Sales across Asia grew strongly in the first quarter of LVMH, the world’s largest luxury group, and chief financial officer Jean-Jacques Guiony said he was “very optimistic on the normalization of the Chinese market”.
Budweiser Apac, the Asia-Pacific unit of Anheuser-Busch brewer InBev, opened an earnings call last week saying “China is back.”
Some companies that hadn’t set too high expectations were able to take advantage of this. Adidasfor example, it reported falling revenues and continued “uncertainty” in China, but its shares still rose 8% on Friday as it said it was seeing “a positive trend” after several years of challenges.
Starbucks said it had seen a “robust recovery” in the first three months of the year, but added that growth had already started to slow and highlighted “uncertainty in the overall environment,” particularly in areas such as international travel.
The comments came despite official figures showing a robust start per year for the Chinese economy, with gross domestic product on track to meet or exceed Beijing’s target of 5% annual growth.
David Donabedian, chief investment officer at CIBC Private Wealth, said the divergence reflected that some observers had simply been too optimistic in predicting an “explosion” in activity, while others were also hoping for looser monetary policy to boost growth.
“There was an expectation that it would be like a coiled spring. . . there was a pickup, but no explosion.
The shift in growth expectations is coming amid heightened concerns among business leaders about Beijing’s control over the operations of US companies in China.
Following raids on the Chinese offices of Bain and other consulting firms, the US Chamber of Commerce said China’s new counterintelligence law “significantly increases the uncertainties and risks of doing business in the People’s Republic.”
Tim Ryan, US president of PwC, noted in an interview that US companies’ awareness of “concentration risks” in China had grown from tariff battles at the start of the Trump administration to supply chain disruptions caused by the pandemic.
“To be clear, I don’t see a decoupling” between the US and China, he said: “What I see is more attention to how you manage risk. What has happened in the last two weeks is further confirmation that they need to continue managing the risks,” she said.
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