China Morgan Stanley report
China Morgan Stanley reportReuters file

Global multinational companies are under-weight on China, the world's second-largest economy. In a report, American financial services firm Morgan Stanley said that the country's outlook for business conditions has "deteriorated," based on revenue trends and guidance of 220 listed multinational companies (MNCs) with combined global sales of $5.4 trillion.

"Morgan Stanley Global MNC China Outlook Business Conditions Index declined to 13% in 4Q15 earnings season from +17% in the 4Q14," it said in its Asia Insight update of March 22. 

The bank said its findings are based on a "detailed review of conference call transcripts" and its own analyst reports that have explicit references to China, reflecting the "combined views of some of the world's most experienced CEOs and CFOs" whose companies either sell their products in China and/or have the majority of their end demand in China. 

Citing the limitations of the sample size, the quarterly update noted: "The average revenue exposure of these global multinational companies to China is about 17.3 percent with the caveat that the availability of geographical exposure data is poor for many companies." 

Morgan Stanley also quoted specific comments by executives in the conference call transcripts used to write the report.

"I wouldn't assume that China's revenue growth will be exactly as it used to be, just given the amount of economic change that's going on in that country," said Ajay Banga, president & CEO, Mastercard. 

"The China slowdown is creating headwinds. I think China is growing between 6% and 7%, but that hides their two-speed economy. The services/consumption sector is growing double digits. But that also means that the industrial complex, the manufacturing sector is growing at 0% to 2%," Piyush Gupta, CEO of DBS Group, said. 

The sample predominantly consisted of consumer durable companies, followed by industrials, materials, IT, consumer staples, health care and financials.

Highlights of the report

  • About 50% of the sample of multinational companies reported current conditions for China as adverse in 4Q15's earnings season as compared to only 37% in 4Q14.
  • Another 43% reported the current conditions in 4Q15 as favourable, but this was down from 50% in 4Q14.
  • In terms of outlook, 48% of the companies now expect an adverse outcome for China versus 34% in 4Q14.
  • Europe, Japan and the US reported declines in the net current conditions balance in 4Q15 versus 4Q14. The net balance for the APxJ/EM region, however, improved to -10% in 4Q15 from -23% in 4Q14.
  • The ten most dominant themes highlighted by companies in their 4Q15 earnings conference calls were China macro, followed by consumption, tax cuts (on cars),currency, smartphones, government policies, the industrial economy,e-commerce, real estate and anti-corruption.
  • The majority of the China macro outlook comments in the 4Q15 earnings season had a negative tone, which suggests companies remain concerned about the macro environment.