This week, all eyes have been on China after the Chinese government decided to devalue the yuan in an attempt to stimulate its sputtering economy. The logic goes that devaluing the yuan makes Chinese exports cheaper, thus more attractive, to international buyers. However, the move spooked the markets yesterday because it signaled that the government is becoming increasingly concerned about slowing growth. Unfortunately, despite China’s assurances that this is a “one-time fix,” I suspect that this will be the first of many devaluations to come.
The other thing impacting China right now is its corruption crackdown. This is actually causing some wealthy Chinese citizens to buy homes in the United States, sight unseen, to avoid the blowback. And, after the Chinese government opened a trading link between Shanghai and Hong Kong, Chinese investors rushed to convert their Chinese yuan into Hong Kong dollars.
I’m getting flashbacks to the 1997 Asian financial crisis; the entire region (including Asia and Australia) has been impacted by these developments. By and large, everyone on the Pacific Rim has been dealing with weaker currencies, except the United States.
So, in the stock market, we’ve been seeing a “seismic shift” out of multinational stocks. However, that’s not to say that all Chinese stocks are automatic sells. Those that trade on U.S. exchanges—known as American Depositary Receipts (ADRs)—are much less volatile than those that trade on the Shanghai exchange. I currently recommend a handful across my various newsletters, and while I’ll sell any that get too hot to handle, they are holding up quite well amidst the chaos.
To give you a sense of which Chinese stocks are doing better than others, I’ve run seven of the largest Chinese companies that trade on U.S. exchanges through Portfolio Grader:
As you can see, there are three A-rated stocks on the list: China Eastern Airlines Corp. (CEA), NetEase Inc. (NTES) and China Southern Airlines Co. (ZNH). As I mentioned in yesterday’s blog, NetEase is scheduled to release second-quarter results after the closing bell today, and I’m hoping that it will outpace sales and earnings expectations. Three others are outright sells—Aluminum Corp. of China (ACH), Baidu Inc. (BIDU) and China Petroleum & Chemical (SNP)—and Sinopec (SHI) is a hold.
Note that three of the underperformers are commodities stocks. The other consequence of these developments in China is that it’s hurting commodity prices. As the world’s largest manufacturing nation, China is a major consumer of commodities. It also stockpiles a lot of commodities. So, fears of a slowdown in China have weighed on commodity prices, which have already fallen due to the stronger dollar. This is why we’re seeing weakness in this sector.