How China’s Slowdown Could Impact Your Portfolio

How China’s Slowdown Could Impact Your Portfolio
Stéphane Renevier, CFA

6 months ago2 mins

Mentioned in story

China's economy has been dealt a tricky hand this year – it’s holding a turbulent property market, a drooping currency, dwindling consumption, and sinking exports. And some investors believe the world’s second-biggest economy could soon find itself on a losing streak. So whether you're pondering a wager on China's rough patch or simply defending your portfolio, here's a useful breakdown of how the chips might fall.

To gauge the potential repercussions of a further dip in China's economy, Goldman Sachs looked back at historical relationships and calculated some odds. Here’s how they see things playing out if the country’s growth comes in 1.5 percentage points below the current forecasts:

Stocks: With that kind of slowdown, the country’s stocks could see a 15%-20% dip. And they wouldn’t be alone in falling: emerging market (EM) stocks would likely see a 13% loss, Japanese stocks would likely see a 9% decline, and Europe’s stocks would likely suffer a 4%-5% setback. US shares, on the other hand, would likely hold pretty steady, with just a 2% loss. Keep in mind, these estimates lean heavily on past data, and today’s markets could chart their own course.

Commodities: China loves its commodities. So a slump in the country’s economic rhythm would likely send shockwaves across commodity markets. Copper could be in for a 20% drop, and oil might see prices slip by 10%. As for gold, it might wobble a tad. Of course, the silver lining here is that this could help ease global inflationary pressures.

Currencies: When things get rocky, the US dollar tends to shine. Goldman estimates that the currencies that take the hardest hit from a China hiccup would be the Australian dollar and the Canadian dollar, with the commodity darlings depreciating by 10% and 5%, respectively. On the bright side, the Japanese yen might flex some muscle, given its reputation as a haven in stormy times.

Interest rates: A slowdown in Chinese growth would likely be good news for bond prices – and would send their inversely moving yields lower, by about 0.25 percentage points, according to Goldman.

So if you’ve got skin in the game in these assets, you’ll want to be alert to the dynamics. And, if you’re thinking about betting big on the next shuffle in China's economic deck, you might consider rallying behind the potential winners, and shorting the potential losers.



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