Chinese and US Markets III

Given the volatility and drops in global equity markets, we thought a short note to members might be helpful.

Members who have been following SNS will already be aware of our warnings from the first two Special Alerts in this series [Alert I] [Alert II].  Those who have not had the time might read them now.

As we suggested in the second Alert, the Chinese domestic economy is undergoing serious collapse.  Global investors probably are not fully aware of this yet, but they have been running for the doors since shortly after that Alert based on the obvious signals coming out of China: the currency devaluation, equity market manipulations, and the capital flight out of China.  Again, the complete list is in our last Alert.

At this time, we have two suggestions which may be helpful, given the range of equity market falls today(Shanghai down 8.5%, US down 3.9%, most others between these) and the likely continued fall in the next few days. Prior to listing these, here is the environment we expect:

1. Depending on timeframe, China’s equity markets are at “fake” levels, pumped by the government to shift the debt of state-owned enterprises into the stock markets, thereby shifting the risk from banks and bondholders to shareholders.  That game is over.
2. The above manipulations caused a runup over the last year of 150 – 200% vs. prior levels.  How far can China’s markets fall?  (This is THE question Wall St. is asking tonight.)  It’s obvious: at LEAST the same amount, so investors should prepare for a very tough ride down by the Chinese equity markets, no matter what the Standing Committee does to manipulate prices.
3. Other Asian markets will tend to mirror this problem, at lower percent declines, just as happened today.  The more they are interlocked with China, the greater their equity market risk and drops will likely be.
4. Countries with their own big problems (such as Russia) may also see very large declines, as global investors decide that any risk is too much, and put their money into safe harbors until the storm is over.

GIVEN all this, the two obvious recommendations for global investors would be:

1. China is the problem, and the US will look like the solution, in the eyes of most money managers.  The US economy remains strong, and the Chinese economy will look increasingly weak going forward.  Money will likely move from Asia and emerging nations, and look for homes in safe US stocks and bonds.  Germany would be the second most attractive investment target, but it continues to suffer from high EU risk issues.
2. Within the US, investors would be wise to sort their portfolios into those companies with zero direct China exposure, and those with maximum exposure; then sell the latter, and buy the former.

Of course, markets are not rational, and this may all take some time to sort out, with plenty of short-term volatility to come.  But shorting China exposure, and buying its lack, seems the best plan today.

—-
[View Chinese and US Markets I]
[View Chinese and US Markets II]
[View Chinese and US Markets III]