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What China's Slowdown Means For Your Portfolio
6/21/2013 3:30:00 PM
In China, the economic news is going from bad to worse.
Still, despite these emerging clouds, most economists haven't pressed the alarm button. For instance, Asia-based HSBC Bank is now forecasting the Chineseeconomy will grow 7.4% thisyear , roughly 1 percentage point lower than previous forecasts. But it's fair to wonder whether that's too optimistic.
These next few months will be crucial in determining whether China has a manageable slowdown, or an accelerating one.
A key sector to watch: Chinese retail spending, which has been growing at a double-digit annual pace. For years, we've been hearing of desires for Chinese domestic consumption to play a greater role in a mostly export-driven economy, and we will now see if such a transition can take place. Keep a close watch on upcoming retailsales figures in China.
One thing is for sure: The Chinese government is no longer inclined to pump up the economy with a big stimulus program, as it has done in the past. The new government stance:Market forces and key reforms will need to sustain the economy, and short-term spending measures will no longer be pursued.
Painful Ripple Effects
Slumping demand in China has also hurt currencies andstock prices in Australia, Brazil and South Africa. Even considering China's role in their economies, however, I expect Australia and Brazil will avoid a major meltdown, in part because of sufficient domestic consumption.
Yet it is wise to grow more cautious about the "Asian Tigers," such as Indonesia, Malaysia, Thailand and Vietnam. Chinese trade -- in both directions -- represents such a huge part of these economies that a deeper slump in China would have a clear negative impact in the region. I'm a huge fan of these tigers, and if their markets slump badly in the next few months, compelling long-term bargains are sure to emerge.
Here's a quick look at how key exchange-tradedfunds ( ETFs ) in this region have fared recently. Notice that most have hit their 52-week highs in just the past few weeks or months.
A QuickSell-Off , But Is More To Come?
Another Headache For Europe
These two trading partners may be locked in a vicious circle, as weakness in Europe weighed on demand for Chinese goods, and spreading weakness in China is now weighing down Europe. Still, as Europe struggles to regain its footing, China's slowdown is just one more headache.
Remarkably, Europeanstocks have fared reasonably well this year: The iShares S&P Europe 350 Index ( IEV ) is not far from its four-year high of $45. Yet the China slowdown may lead investors to reassess their bullishness.
Heading For U.S. Shores
In addition, consumer electronics firms like Apple (Nasdaq: AAPL) and Sony ( SNE ) all count on the Chinese market for solid demand. Don't be surprised to hear about emerging pockets of weakness in upcoming conference calls.
As noted, the neighboring Asian Tigers are sodependent on China for trade that they're also witnessing an economic slowdown. Apple, Ford, Caterpillar ( CAT ) and others U.S. firms with sizable sales presences in Asia would be affected.
Can We Avoid The Contagion?
Risks to Consider: As anupside risk, China has had a few growth scares in the past five years and managed to rebound fairly quickly. However, those rebounds were aided by coordinated government stimulus, which does not appear to be anoption this time around.
Action to Take --> It's important not to be overly alarmed by China's incipient economic weakness. It may only make a modest dent in our economy. Still, with many investors now beginning to look past the impact of the Federal Reserve's quantitative easing program, global markets may again fixate on the still-troubled international economy. Stay tuned to economic news in Asia and Europe as the next few months will determine how the rest of the year -- and perhaps 2014 -- plays out for investors.