Stocks to Avoid in a Chinese Downturn

Recent manufacturing data from China disappointed the market. It once again raised the question of whether growth in China can sustain these levels. Many believe that a Chinese slowdown could spiral the global economy into recession. This is because it is the world’s second largest economy. China is also Australia’s largest trading partner, purchasing 30.6 per cent of our exports. Our second highest trading partner is Japan, with a distant 12.7 percent.

We believe that the Chinese will continue to take measures to maintain growth and confidence in their market during 2019. However, what if the opposite occurs and China does experience a slowdown? What industries and stocks would be affected on the Australian market?

Commodity Stocks

A third of Australia’s exports are shipped to China. The China-US trade war has caused China’s imports to decline 7.6 per cent. This is the biggest monthly fall in two years. As China is a major consumer of commodities, this sector will be hit hard if there is a decrease in demand.  Australia exports coal, wool, copper, barley, crude minerals, gold, and aluminium to China. However the largest export is Iron Ore. The biggest iron ore companies in Australia are BHP (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue (ASX:FMG). These companies may therefore see a decrease in demand if the Chinese economy experiences a prolonged downturn.

Tourism Stocks

The Chinese spend $11.3 billion when holidaying in Australia. This makes up about 26.5 percent of the total tourism revenue. If there is a Chinese downturn, then tourism stocks will be hit.

Gambling Stocks

The worsening conditions of the of the China-US trade war is softening the Chinese economy. This may affect the disposable income of the Chinese and their spending behaviour when travelling.

Casinos are a favourite for Chinese tourists. This means that gambling stocks such as Star Entertainment (ASX:SGR) and Crown (ASX:CWN) may come under pressure . Crown’s player base is comprised of 66 per cent Asians. Crown attributes 33 percent of its Australian revenue from Asian and Chinese customers. Australia has also been able to obtain 8 percent of the global VIP gambling revenue. This is made up of the affluent gamblers from Asia or China.

Airline and Transport Stocks

Chinese tourists rank as the largest visitors to Australia. As of Feb 2018, just under 1.4 million Chinese tourist visited Australia in the year. Chinese tourist account for just under 25% of global travel spending. If there is a slowdown in the Chinese economy, these tourists may decide to take holidays closer to home to lower costs. Otherwise they may not travel at all. This would impact Sydney Airport (ASX:SYD) with less air passenger numbers. Other tourism stocks which may be affected are (ASX:QAN) and tourism and transport group Sealink Travel (ASX:SLK).

Education services

The largest proportion of overseas students comes from China at 31 percent. Education is Australia’s third biggest export income earner. If China’s economy does soften then there may be a decrease in international students. Chinese students may decide not to study abroad or study at cheaper locations. Some of these Australian education companies servicing international students include Navitas (ASX:NVT) and IDP Education (ASX:IEL). These stocks may be affected if there is a decline in foreign student numbers.

Consumer Products

The Chinese have trusted Australian brands as they believe these have been manufactured with high standards. They love Australian natural brands such as Sukin which is the main brand of BWX Limited (ASX:BWX). Sales of these products are being purchased by these Chinese visitors in Australia. Australian milk products such as Bellamy’s (ASX:BAL) and A2Milk (ASX:A2M) are popular with the Chinese. This is because they view these milk product brands as safer than domestic brands. Sales of these Australian products may soften if China’s economy starts to cool.

Lauren Hua is a private client adviser at Fairmont Equities.


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