When I first moved from the finance industry to Report on Business in 2013, there was significant reader interest in China. This has faded to apathy over time, which might turn out to be an unfortunate trend – the continuing slowdown in the country is beginning to threaten Canadian portfolio returns.
The deceleration in Chinese growth, thanks to strict enforcement of environmental standards that has caused power shortages and a regulatory crackdown on real estate-related lending, has been remarkable. The data are “really quite weak,” writes Citigroup economist David Lubin. He points out that China’s third-quarter GDP growth rate of 4.9 per cent, announced last week, was the lowest in at least 30 years excluding COVID-affected 2020.
Decades of double-digit growth rates have left China as the dominant source of global GDP growth. Savita Subramanian, U.S. quantitative strategist at BofA Securities, estimates that the Middle Kingdom was responsible for 30 per cent of global economic growth over the past 20 years. The slowdown affects most markets worldwide.
In a recent research report, Modest Impact So Far; More Pain Likely, Ms. Subramanian described the effects of China’s lower growth on U.S. corporate earnings. BofA’s economists recently cut their 2022 GDP growth forecasts for the United States by 1.3 percentage points (to 4 per cent) and the strategist estimates that this represents a haircut of 4.4 percentage points for U.S. profits this year.
China’s slowdown is not priced into U.S. stocks, according to Ms. Subramanian. She notes that the 50 S&P 500 companies with the largest revenue exposure to China still trade at a premium of one standard deviation to the rest of the market.
Materials stocks, including commodities, and technology companies have historically been the most sensitive to changes in China’s growth rate. This puts profits for the TSX’s sizable weighting in resource-based stocks at risk for 2022.
In the past, Chinese officials would react to economic hiccups with immediate stimulus but this time could be different. BofA Asia strategist Ajay Singh Kapur recently wrote that “What worries us more is the stoical approach of policy-makers towards the weakness in the equity and property markets, allowing a spate of defaults to go through without relenting their hawkish stance.”
Importantly, a recession in China is extremely unlikely and growth rates are likely to remain respectable relative to the developed world. That said, investors should pay close attention to Chinese economic data and correlated commodity prices – notably iron ore and copper – to gauge portfolio risks.
-- Scott Barlow, Globe and Mail market strategist
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Ask Globe Investor
Question: I was wondering if you could provide your opinion regarding Canadian Depositary Receipts (CDRs) issued by CIBC for fractional ownership of expensive U.S. stocks such as Microsoft, Google, Amazon, etc.? Are they appropriate for small investors looking to participate in some of these companies? Thanks, Tom M., Saskatoon
Answer: Give credit to CIBC for some clever financial engineering here. The bank has created a product that makes U.S. stocks that trade at hundreds or even thousands of dollars available to Canadian investors at a fraction of the cost of the underlying security.
Plus, the CDRs are currency hedged. The bank explains it this way: “The CDR Ratio is automatically adjusted on a daily basis to account for the notional currency hedge. If the Canadian dollar increases in value compared to the U.S. dollar (or other relevant foreign currency), the CDR Ratio for each CDR is adjusted to represent a larger number of underlying shares. Conversely, if the Canadian dollar decreases in value compared to the U.S. dollar, the CDR Ratio for each CDR is adjusted to represent a smaller number of underlying shares.”
The units had an initial price of about $20. They all trade on the NEO Exchange, often under the trading symbol of the parent company. So, for example, if you want to own fractional shares in Amazon you would buy AMZN CDRs on the NEO Exchange. They closed on Oct. 22 at $20.93. Full Amazon shares finished that day in New York at US$3,335.55.
CDRs are available for a wide range of companies. They include Apple Inc., Disney Inc., Alphabet Corp., Facebook Inc., Microsoft Corp., Netflix Inc., PayPal Holdings Inc., Tesla Inc., and Visa Inc..
Dividends from the parent companies are passed through to CDR investors in Canadian dollars. CIBC says there are no on-going management fees.
You can find more information at https://cdr.cibc.com/#/cdrDirectory.
As for my opinion, I would prefer to own the basic shares. But these CDRs are a worthwhile option for investors with limited resources and who like the currency hedge. – G.P.
--Gordon Pape
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Compiled by Globe Investor Staff