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Number Cruncher

Taking stock of a looming slump in China Add to ...

What are we looking for?

China's rapid growth over the past several years has been a boon to many of the countries that surround it - as well as to investors in the many Asian markets that have benefited. But that has left those markets, and many companies in them, exposed to the risk of a sharp downturn in China's economy - something that has become a growing fear.

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"Specifically, we are concerned by the country's property and credit markets at a time when monetary authorities are tightening aggressively," wrote Pierre Lapointe and Alex Bellefleur of Brockhouse Cooper in a recent report. "Moreover, we question the future of China's real estate values, at a time when significant supply is hitting the market, banks are less willing to lend and monetary tightening is ongoing."

Mr. Lapointe and Mr. Bellefleur - who have long maintained an overweight recommendation on the Asian region - decided it was time to ask the question: If China were to slump, which big stocks in other Asian markets are most exposed?

Chinese revenue screen

Mr. Lapointe and Mr. Bellefleur ran a stock screen to identify companies in Australasian and Asian markets outside of China that rely the most on China for their revenues. They limited their search to stocks with more than $2-billion (U.S.) in market capitalization. (They updated their data for publication in today's column.)

The list is top-heavy with stocks from Singapore, and to a lesser extent South Korea and Australia. The Singapore market's exposure to China is even more pronounced given its composition - three of the Singapore companies in the top 10 on the list are in the real estate sector, which may be the most at-risk market segment for a Chinese downturn.

Hedging for a Chinese slump?

If you're concerned that a significant slowdown in the Chinese economy is imminent, would the short-selling of these stocks be a winning strategy? Maybe, say Mr. Lapointe and Mr. Bellefleur - but they feel it's too risky an approach to recommend.

"These [short]positions face unlimited losses and may lose a lot of money if they prove to be early. The same is true of taking short positions in the currencies of countries highly exposed to China through exports," they said.

"We believe that hedges where the downside is well-defined and capped would be more effective. For example, taking credit protection [credit default swaps] on companies who depend on China for a significant portion of their revenues might be better, as downside is limited to the premium paid to the seller of credit protection," they suggested.

 

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