China worries continue this week as the nation’s stock markets are falling deeper and deeper into a slump. Today’s declines come despite the lack of news surrounding the Chinese markets, indicating that investors remain wary amid questions about what Beijing plans to do next following the move earlier this month to prop up the stock market.
Shanghai-listed equities declined 8.5% today, while stocks traded on the ChiNext fell 7.4% and Hang Seng stocks fell 3.1%. According to analysts at Evercore ISI, the Shanghai Composite Index’s 8.5% decline marked its worst day since 2007, closing at 3726. The index opened lower today and kept falling throughout the trading day in China. However, the Shanghai index remains up 75% year over year.
The ChiNext index closed at 2683 today but also remains up for the year by a whopping 109% compared to last year. The Hang Seng in Hong Kong closed at 24352 and is doing much more poorly than the Mainland China indexes, as it is only up 0.6% year over year
Evercore ISI analysts Donald Straszheim, Erik Lundh and Neo Wang tell investors to “stay away” from Chinese stocks right now as the markets’ weakness is due to a lack of confidence and weakness in the nation’s industries. They also point that 65% of A-shares in China fell by the daily limit and that trading on 19% of A-shares remains halted for no apparent reason.
The country has made some progress in getting trading moving again on some A-shares, as one week ago, trading on 635 of them was halted. Now trading on 525 A-shares is halted, including both Shenzhen and Shanghai-listed companies.
Further, data on China’s industrial revenue and profit is quite weak yet again. The Evercore team noted that both metrics are much lower than China’s overall industrial data. Also data from NBS on consumer confidence in China shows that it remains volatile, declining 4% in June after rising 2.1% the month before.
Doubts about China
One problem some investors may have with China is that Beijing doesn’t seem to believe its own projection of “reasonable range” of growth, which was 7% in the first half of the year. According to Straszheim and team, no one actually believes it because of the government’s “aggressive” fiscal and monetary policies.
Because of China’s position as the world’s biggest market by population, any upset is sure to send ripples throughout the world’s economies and in fact already has. Natixis analysts say we can expect the turmoil in China to boil over into both developed and emerging economies. They also expect the prices of many commodities to decline and see upcoming “transformation” in the world’s industry. Further, they expect consumer durable purchases, in addition to investments, will be affected by the downturn in Chinese equities.
The Natixis team doesn’t expect the value of the Chinese renminbi to decline significantly because Chinese officials have been striving to keep it stable as they attempt to internationalize it. They’re targeting about 6.35 renminbi per one U.S. dollar, compared to about 6.11.
They think the bigger impact will be on commodity prices. For example, they think Brent crude oil prices could tumble by between $15 and $17. That compares to their 2016 baseline estimate of about $57.30. They also expect prices of iron ore to decline sharply to approach $40 per ton in a fashion similar to what happened in 2008 and 2009. They expect less of an impact on copper and zinc but a positive impact on gold prices, which could climb as high as $1,300 per ounce.
Some markets may benefit from China problem
The Natixis analysts also see positive benefits for fixed income markets which have “expansionist monetary policies,” like the U.S. Federal Reserve, the European Central Bank and “satellite central banks.”
“Bull flattening and the compression of sovereign spreads would be the order of the day,” they wrote.”
They also expect that investors will prefer stocks from developed countries, especially Europe. Further, they think value investing will be in focus. For cross-asset allocations, they like a more defensive strategy with lower exposure to CVaR and corporate bonds and greater exposures to gold and Treasuries.
Which sectors are the most exposed to China?
Looking at various sectors, they say semiconductors will be the most exposed because so many companies in the sector are do business or are located in China. They think Infineon could be the worst-affected as 40% of its activities are in China.
They also noted impacts on the auto industry, where they say BMW and Volkswagen are the most exposed. The Evercore ISI team also noted negative impacts on China’s auto industry as already total vehicle sales there are expected to rise no more than 5%. Japanese, German and Korean automakers are especially concerned about their China presence. In terms of auto parts, they see risks for Faurecia, Plastic Omnium and Valeo.
Companies with indirect exposure to China include Shell and ArcelorMittal, among others. They add that most European banks should be safe as only HSBC and Standard Chartered have “substantial” China business.