Tuesday, June 10, 2014

Gary Shilling: Short Chinese stocks, sell commodities

Short Chinese stocks

The Shanghai Composite Index is down 67 percent from its October 2007 peak. Even though Chinese stocks may seem inexpensive -- the price-to-earnings ratio for the Shanghai index over the last 12 months is 9.8, compared with 17.3 for the far more costly S&P 500 -- there is no obvious floor. If China has a financial crisis, the risk to Chinese equities is considerable. Bank stocks may be especially vulnerable. Investors who lack direct access to mainland Chinese stocks can use Hong Kong-listed equities and exchange-traded funds.

Sell commodities 

Industrial and agricultural commodity prices took off in 2002, right after China joined the World Trade Organization. As manufacturers in Europe and North America shifted production to China, its thirst for commodities kept growing. Many producers of industrial materials, including base metals, iron ore and coal, also increased capacity as prices leaped.

Along came the global recession, which drove down materials prices in response to weak demand. Prices soon recovered, only to fall again in 2011, possibly in anticipation of slowing growth in China, which is embarking on a difficult transition from an export-led economy to one driven more by domestic spending. A financial crisis in China would no doubt further depress commodity consumption and prices.

via http://www.bloombergview.com/articles/2014-05-29/investing-for-a-china-crisis