Why #ChinaSlowdown Is Trending On Wall Street

• Barclays is forecasting 6.0 percent GDP growth for China in 2016.
• U.S. equity markets and agricultural commodities have relatively small sensitivity to China’s growth.
• Barclays determined that copper likely has the most downside associated with China’s slowdown.

In a new report, Barclays analyst Guillermo Felices takes an in-depth look at the shaky Chinese economy. Barclays’ regression analysis identified the assets that would be most sensitive to a further slowdown in China in 2016.

Outlook
The 2016 China growth numbers will likely be critical for global asset markets, as fears surrounding Chinese growth were the root of the August selloff in equity and commodity markets. Barclays is forecasting 2016 China GDP growth of 6.0 percent, well short of 2015’s 6.8 percent growth rate.
 

Barclays analysts identified the assets that are most sensitive to a China slowdown by comparing asset performance over the past year to implied performance based on slower China growth.
 

Not material
In terms of equities, Barclays determined that U.S., European and Japanese markets should be mostly insulated from major China-related moves. The consumer, tech, financials, healthcare, utilities and telecom sectors are particularly detached from China growth numbers.

In terms of currencies, the MXN, TWD, and PLN should also see very little impact from China.
China should also be mostly immaterial for agriculture commodities, while oil has only a moderate sensitivity to China.

Largest sensitivity
The group of assets with a high China beta that Barclay’s deems most risky to own at current levels include most emerging equity markets (Mexico, Brazil, India, etc.) and currencies such as IDR and AUD.

In the commodity space, gold and copper are most at risk from a China slowdown.

“Copper has the highest beta (6x) and the current price is still above our model prediction,” Felices explains. Both gold and copper remain priced much higher than their pre-boom average prices.

Investors that believe that the China slowdown could be worse than expected in coming years should consider shorting the iShares FTSE/Xinhua China 25 Index (ETF) FXI, the iPath Bloomberg Copper Subindex Total Return Sub-Index (ETN) JJC and the SPDR Gold Trust (ETF) GLD.

Disclosure: the author holds no position in the stocks mentioned.