The “X Factor”:  Exposure to China

Me-thinks an instant investing line has popped up in the wake of unprecedented stock market volatility the last 2 weeks:  the way to play this market going forward is to suss out individual companies’ China exposure.

In a nutshell, here’s the thesis:

Lots of China exposure = bad.

Minimal China exposure = good.

Surprising Bright Spot:  U.S. Housing 

In the first “bad” camp:  capital equipment makers like Deere and Caterpillar; any company that finds or sells raw materials (the various miners, including BHP Billiton, Rio Tinto, Anglo American, etc.); ditto for companies that find or sell energy (ExxonMobil, Chevron, Schlumberger, etc.); companies that are tied to capital spending, specifically in Asia.*

In the second, “good” camp:  publicly-traded home builders like DR Horton, Lennar, and Pulte.

Why home builders?

Because:  a) the U.S. housing market — especially new construction — is proving to be surprisingly robust (no hint of U.S. “ghost cities,” like in China; and b) the perception that “whatever (bad) happens in China, stays in China.”

Insular vs. Interdependent Markets

I tend to agree with that analysis, provided that the “whatever happens in China” part of the equation is right.

However . . . while housing is local, housing finance is very much global, as the world discovered in 2008 and thereafter.

If fallout from China’s slow-down drives up interest rates, that would undermine housing’s strength.

One such scenario, conjured up by New Jersey Governor Chris Christie and others:  strapped (or vindictive) China starts dumping its trillions in U.S. debt.

Were that to happen, though, you’d know, because long-term interest rates would soar.

In reality, they’ve been flat to down the last 2 weeks.

*The “China exposure” angle isn’t necessarily black or white.

In the gray category:  Apple, and how China’s slowdown will affect that country’s heretofore voracious consumers (and demand for what economists call “non-durable goods” like cell phones).

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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