For more than two years, China has been the bright spot of the world economy, growing by leaps and bounds, boosting demand for all kinds of commodities and precious metals. China has also been the base of many Internet-based companies that have made their debut on US exchanges, attracting the interest of US momentum investors. In recent months, this growth has been slowing down, however, with a key-manufacturing gauge registering below 50 last week, and Federal Express (FDX) warning of a slowdown in China’s international shipments. That is bad news for three classes of investments, US and Canadian exporters, precious metals, and Chinese momentum stocks—sectors that investors may want to avoid or establish short positions:
U.S. and Canadian exporters and precious metals: Top on the list are coal companies that have benefited from China’s manufacturing growth like Walter Energy (WLT) that missed on second quarter revenues by a great margin, issuing a second warning last Tuesday; Cliffs Natural Resources (CLF); and Molycorp (MCP); fertilizing companies and Potash (NYSE:POT); and industrial and manufacturing companies like General Electric (GE), and Caterpillar (CAT).
Precious metals: Precious metals traced by Ishares silver trust (SLV); SPDR Gold Shares (GLD); and Freeport-McMoRan Copper and Gold (FCX), have been benefited both from China’s manufacturing growth, and from China’s rising inflation. This means that China’s slowdown is a double negative for precious metals.
China-based Momentum stocks: A slowdown in the Chinese economy will create headwinds for China’s momentum stocks like Youku.com, Inc. (YOKU), Sina Corporation (SINA), Baidu, Inc. (BIDU), and Sohu.com Inc. (SOHU).