Fallout from China’s Black Monday limited – for now

China’s stock market crash seems to have had only a short-lived impact on stock markets in Europe, with the NMX4570 index of UK pharma and biotech companies bouncing back today.

With 8.5 per cent wiped off the Shanghai on Monday morning, other markets quickly followed suit and the FTSE 100 ended the day down 2.8 per cent, but returned to positive territory this morning along with other bourses around Europe.

Pharmaceutical stocks remained largely unmoved and, if they shifted at all, tended to do so in the positive direction as investors shifted from volatile stocks such as fast-moving consumer goods (FMCG) to those considered to be more defensive.

The NMX4570 (part of the FTSE 350) had been on the slide for a while and fell sharply on Monday morning, but at the time of writing had clawed back most of that decline, with AstraZeneca, GlaxoSmithKline and Shire all showing gains at, or above, the index line this morning.

Pharma has been particularly insulated from the decline because China’s slump is expected to deliver the hardest blow to producers of commodities rather than high-value, essential goods.

The stock market in Brazil, for example, which supplies vast quantities of raw materials to feed China’s economic engine, lost 3 per cent yesterday and is expected to come under renewed pressure when it opens again later today. Meanwhile, Anglo-Australian mining giant BHP fell 9 per cent.

The plunge did have an impact on manufacturers of luxury goods, which has been a growth market in China thanks to increasing disposable income and a rapidly expanding affluent class. Apple, for example, fell 2.5 per cent yesterday on panic that huge sales to China would be affected.

China’s central bank cut interest rates this morning to try to stabilise the exchange – the fifth such reduction since November 2014 – while the relatively calm reaction of the Beijing government to Black Monday seems to have prevented the panic from spreading to other markets.

Long-term impact

What has become clear in recent months is that businesses outside China can no longer rely on the country to help drive revenues, as decades of strong growth seem likely to be replaced with rates associated with more mature economies.

A number of big pharma companies have highlighted sales of products to emerging markets such as China and other Asian countries as a key component of future growth, although that message was particularly strong a few quarters ago when pipelines were looking weak and revenues were under more pressure.

With the market slowdown taking hold and China’s government striving to keep a lid on medicine costs that account for 40 per cent of healthcare spending – roughly twice that of established markets – it seems likely that the pharma market in China is heading for a long spell of weakness.

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