Forecasts for China’s economy are being revised downwards. Why? It’s because of April-June growth. While still strong, it came in a tad below expectations at 7.9%. More recently, a sharp rise in Covid-19 cases is driving the authorities to react swiftly. This is expected to have an economic impact too, resulting in leading banks like Goldman Sachs and JP Morgan to halve the country’s expected growth rate for the current quarter.
If this trend continues, the Chinese economy could slow down over the rest of the year as well. This in turn will impact FTSE 100 stocks in two ways. The first is through an overall slowdown in global growth. China is the second largest country-economy in the world after the US, with strong trade links with the world. A slowing down there will be felt across the world. The old saying that when the US sneezes, the world catches a cold may well be true for China now as well.
The second is its impact on FTSE 100 companies that rely on the market for their growth. I can get more specific here.
Impact on FTSE 100 miners
In the past year, industrial metals have rallied because of huge public spending by the Chinese government to lift the economy out of the pandemic-induced doldrums. Big FTSE 100 miners like BHP, Rio Tinto and Anglo American have benefited from this.
However, whether a slowdown will necessarily impact their fortunes remains to be seen. It may encourage the Chinese government to keep up with its spending. Moreover, public spending by the US is slated to be in trillions of dollars over the next few years. As long as it gets funnelled into infrastructure creation, industrial metals’ demand — and hence prices — will remain elevated. Nevertheless, I am watching this segment carefully to see how the balance of factors plays out.
Asia focused bank
The banking and financial services corporation HSBC is another FTSE 100 China-focused stock. In recent years it has been caught in geopolitical stresses resulting from the US-China tensions and the Hong Kong handover. The pandemic was another blow. I was just about getting bullish on it again, but if its key market slows down, it will be impacted again.
Luxury in China
Burberry, the British luxury brand and FTSE 100 stock is also popular among the country’s increasingly prosperous consumers. Recently, it suffered a setback after its CEO Marco Gobbetti, known for driving a brand transformation, quit. And its numbers are still not entirely back after the pandemic. Softening in the Chinese market could be bad news for the stock.
My takeaway
All in all, though, while it is important in my view to flag the China risk, it is essential to bear in mind that the Chinese slowdown may not be as significant as predicted. It is entirely possible that the economy can bounce back in a quarter. But in case it does not, I now have a list of stocks to watch carefully from here.
