China's improving economic outlook is one of the bright spots on an otherwise murky horizon for European stocks, with the potential to fuel rises in miners, carmakers, chemical groups and capital goods stocks.
Signs of a Chinese recovery are emerging, and analysts say the impact of stronger growth on companies selling into that market could partly compensate for continued weakness in Europe and the United States.
Most European firms with a presence in China still generate only a small part of their sales in the country, where domestic consumption as a proportion of GDP is lower than in the West, meaning the impact is likely to be limited.
But any exposure at all to an economy tipped to expand at 8 percent while much of the rest of the world stays mired in recession carries potential benefits.
If you are making investments in European and North American companies, beware of what the level of Chinese exposure is. In this climate, it might be better to say the more exposure, the better, Stephen Pope, chief global market strategist at Cantor Fitzgerald.
Chinese stocks have risen 32 percent this year compared with a 65 percent fall in 2008, and a $585 billion stimulus package unveiled in November last year powered a surge in emerging market stocks.
The country's central bank last week expressed confidence that expansion for 2009 would run at close to the official target of 8 percent, while investment banks including Goldman Sachs have upgraded their growth forecasts for the world's third-largest economy.
MINING AND CARS
It's likely to be prove very beneficial to ... people who supply into the Chinese economy. That would be mining and industrial-type companies, said Neil Dwane, European chief investment officer at RCM.
Miners have been the best performing sector in Europe this year, up 22 percent, partly buoyed by China's stimulus package.
According to Goldman Sachs, Vedanta Resources makes 23 percent of its sales in China, BHP Billiton 20 percent, Rio Tinto 18 percent and Xstrata 15 percent.
Of the industrial goods and services companies that have high sales exposure to China, Goldman Sachs last week highlighted -- among others -- A.P. Moller-Maersk, SGS, ABB and Vallourec.
It will also help auto manufacturers, given their growing demand for cars in China. It would definitely help German capital goods companies because obviously they would be making a lot of the kits that China needs to make, RCM's Dwane said.
China has been a bright spot for automakers such as Volkswagen, Daimler and BMW. VW sold 112,466 vehicles in China and Hong Kong in March, up 9 percent from the same month last year.
Denmark's Vestas Wind Systems, the world's biggest wind turbine maker, said on Tuesday that its sales in megawatts grew more than 3 percent in China in the first quarter of 2009, while sales in Europe slipped 5.5 percent.
Mark Bon, fund manager at Canada Life, said drinks companies like LVMH may also benefit from higher consumption by shifting their focus to China.
China would also need more oil products to support its construction activity as Beijing pushed to improve the country's infrastructure, Bon said.
It will demand higher usage of energy to produce all the building materials, to produce roads and all the infrastructure ... which have the tendency to suck in oil products and products to support construction activity, so certain chemicals which will be used in building materials, he said.
It will reignite demand for some oil products.
But though European companies have been ploughing investments into China for the past decade, they have had little to show for it in terms of profit.
Bon said the Chinese market represented only a small portion of the business for European companies.
It's good to get some exposure to the Chinese story (but) it's not easy if you are doing it through European companies, he said.
Philip Lawlor, chief portfolio strategist at Nomura, said Chinese domestic consumption in terms of gross domestic product was much lower than the West and would take years to reach similar levels.
Is it going to be enough for the likes of VW to say, 'Actually don't worry about what's going on in the world and China is taking up the slack'? I doubt it, he said.
The bottom line is that we shouldn't get too carried away with China ... Stabilising (it) doesn't mean it's going to be the growth engine for Western markets.
But in such a tough economic climate, it was still wise for investors to look for companies with strong exposure to China, analysts said.
Bank of America-Merrill Lynch analysts in the United States and Hong Kong last week advised clients to go long on South Korean industrials, which have high correlation with China's growth story among MSCI Emerging Market sectors, and short Israeli healthcare, the least correlated.
(editing by John Stonestreet)
(c) Copyright Thomson Reuters 2009.