Both the FTSE 100 and the FTSE 250 are trading lower today. Different parts of the stock market are responding to different events, but there’s a lot to be worried about for investors at the moment.
High inflation getting in the way of economic growth is one issue. A second is the expectation of a rise in interest rates in the USA. But the most significant stock market action today seems to be in response to the possibility of further lockdowns in China.
Overall, things look bleak for markets at the moment. But I think that this means that there might be opportunities for me if I can find the right shares.
China
While the rest of the world has been emerging from the pandemic, things have been more difficult in China. As the UK eases travel restrictions, reopens schools, and removes restrictions on freedom of movement, China has reintroduced some even more aggressive lockdown measures than before.
This has been most prominent in Shanghai, which is entering its fifth week of lockdowns. But over the weekend, news emerged of an outbreak in Beijing. With mass testing beginning in the Chinese capital, there are fears that this could lead to more lockdowns, which would be bad for the Chinese economy.
If factories close and travel is banned, demand from China for raw materials and commodities will decrease. This is not good for companies like Rio Tinto (LSE: RIO), which produces iron ore and oil companies like BP (LSE: BP).
UK stocks
Rio Tinto gets around 58% of its revenue from China. If local production stops, then it will need to buy iron ore and I would expect revenues at the FTSE 100 mining company to fall as a result. But the situation is worse than this.
If there’s a significant reduction in demand for iron ore from China, then the price of iron ore is likely to fall. Rio Tinto doesn’t have the power to set its own prices, so it might find that it is not only able to sell less of its core product, but it’s getting less for the iron ore it is able to sell.
BP faces a similar situation. With travel restrictions in place in China and non-essential work suspended, China’s demand for oil is likely to subside. While BP’s direct exposure to the country isn’t as great as Rio Tinto’s, the company is likely to be hurt by falling oil prices. That’s why its shares are trading lower today.
It’s not just Rio Tinto and BP that are dragging the stock market down today. It’s not even just the commodities and energy sectors. Across the board, shares in companies with exposure to China are under pressure to a greater or lesser extent.
So am I panicking and selling up? No! In my view, times like this can present some excellent opportunities to add shares to my portfolio. I’ve wanted to invest in Rio Tinto for some time, but I’ve thought that the high price of iron ore was likely to prove unsustainable. Today’s decline across the stock market might be the opportunity that I’ve been looking for.
