Thomas McGarrity, head of equities for RBC Wealth Management in the British Isles, discusses the outlook and impact for investors of challenging relations between Europe and China.

Thomas McGarrity from RBC Wealth Management highlighted last Friday how tensions were caused after European Commission president Ursula von der Leyen and French president Emmanuel Macron travelled to China this month, despite trying to create a united front. 

“Von der Leyen, speaking for Europe, aims to lessen the economic reliance on China as geopolitical concerns have increased,” he said in a statement. On the other hand, Macron, heavily criticised at home for wanting to increase the retirement age, opted for a more conciliatory message. He had a different schedule from Von der Leyen, and attended a state banquet with Chinese president Xi Jinping, without her. 

“Eager for some positive headlines, he worked at strengthening economic relations with the super power. More than 50 French business leaders travelled with him and signed a long list of deals to supply China with French products,” Garrity added. “For Europe, the challenge remains to balance its economic interests and security needs,” he said. 

Garrity also underlined the attractive opportunities for investors in European equities this year as China reopens, after its zero-Covid policy. This includes luxury goods firms such as French multinational LVMH which reported stronger results in the first quarter of 2023 than had been forecast by consensus â€“ the group delivered organic revenue growth of 17 per cent year-on-year. “Its largest division, fashion and leather goods, which accounted for over 50 per cent of sales in the quarter, saw organic revenue growth of 18 per cent,” he said. 

The company confirmed that sales in China were up by double digits year-on-year in Q1. The chief financial officer, commenting on LVMH's results, said that it has seen a “pretty nice pick up in China, which bodes well for the rest of the year.”

Meanwhile, UK February GDP data came in at 0.0 per cent month-on-month growth (ie, flat), below consensus expectations, he continued. The effects of strike action weighed on parts of the services sector such as education and public administration. He sees UK GDP on track for a small positive gain in Q1 2023. “The meagre growth outlook for the UK economy means we continue to have a strong bias for more internationally oriented UK-listed companies,” he concluded.