Trade of the Day: CAC40, France to be hit by slower China growth
Trade parameters: Sold CAC-40.I CFDs at 4.140.37 with stop at 4.250 (on close)
Trade idea background
France and its stock market “own” the luxury goods market. According to Bain & Co. it controls 25 percent of the world market for these sought-after products. The problem with this “luxury” is of course that emerging market growth overall, and Chinese growth in particular, is slowing dramatically under the headline “quality growth instead of nominal growth”.
I have just been to several of these luxury markets: Hong Kong, Singapore, Indonesia, Brazil and Dubai and except for the latter, all of them are in a deliberate slowdown move. This process is often engineered by the relevant governments as either current account deficits (Indonesia and Brazil) or misallocation (China, Hong Kong) of free floating capital has created bubble-like economies, chiefly in housing and investments.
China’s President Xi Jinping has over the last few days indicated that 7.5 percent growth is no longer feasible. A Xinhua news story ran the headline: Xi says environment for economic development isn’t optismistic. This is being interpreted by “official” China to mean a new growth target for 2014 of 7.0 percent (down from 7.5 percent recently).
I have pointed out before (using a Barclay chart) that every Third Plenum has a “growth tax” of roughly 200-400 basis points of growth:
France, the country, remains the elephant in the room in Europe. It is certainly part of core Europe but is now trailing its other core partners in growth, productivity but also on its ability to create a mandate for change . This is overdue. Even the EU is now getting concerned about France (and that takes a very negative outlook):
EU issues warning to France over 2014 budget
Finally, Paul Polman, CEO of Anglo-Dutch consumer goods multinational Unilever, pointed out that even on the company level, emerging markets data looks vulnerable (Unilever is the emerging markets company).
“Paul Polman said the economic slowdown in emerging markets is here to stay as many countries need to enact structural reforms to adjust to new conditions after the boom of recent years.”
My friend Mish wrote an excellent piece on the whole sector the other day. (see his article here)
Trade idea chart:
A catalyst for the short position is that we broke 100-day moving average on the close yesterday:
Source: Bloomberg
—Edited by Clare MacCarthy
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Trade of the Day: CAC40, France to be hit by slower China growth
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