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).