A Chinese Hard Landing Will Destroy Your Portfolio

Published in Investing on 19 June 2012

This crash will burn your portfolio.

When an investment bubble bursts, people always ask why nobody saw it coming. The truth is, most people did see it coming. They just couldn't be sure.

I remember investors fretting about technology valuations months before the dot-com crash, but that didn't stop them piling into tech stocks and funds up to the last minute (me included).

We all knew the house price boom was getting out of control, but people were still queueing up for 125% mortgages and buy-to-let loans the day the credit crunch struck.

That's one of the problems with bubbles. They don't burst when you expect them to.

Hard times

Take the long-awaited Chinese hard landing. If it happened tomorrow, people would ask why nobody saw it coming. In fact, we've been worrying about it for ages.

It's now more than two years since I asked will China's property bubble go pop? One year ago, I asked has China engineered a soft landing?

We are all still asking the same question, and still don't know the answer. But if China does crash, it will seem inevitable in retrospect.

China on their minds

When people get bored of worrying about Europe, they start worrying about China again. I had lunch with Rob Pemberton at wealth managers HFC Columbus last week, and he was definitely worried.

China saved the world in 2008 by "unleashing the mother of all stimulus packages and keeping the rest of the world from slipping even further into recession", he said.

It embarked on a massive construction and infrastructure spend, pouring billions into ghost cities, empty shopping malls and roads to nowhere, consuming 50% of the world's tin, nickel and copper.

But it can't keep this up forever, he continued: "It has ended up with a residential property bubble, scary shadow banking system, sticky inflation, rising wages, strengthening currency and disenchanted middle class."

Not to mention growing unemployment, lousy healthcare, an outdated education system and growing gap between rich and poor, Pemberton added (or was he talking about the UK at this point?).

What China does have, however, is vast reserves of wealth and foreign currency, which is always handy in a crisis (now he definitely wasn't talking about the UK).

The real deal

Ted Scott, director of global strategy at F&C, is also worried -- pointing out that over the last two months, every single Chinese economic indicator has disappointed market expectations.

"Bank lending, the money supply and property market all suggest the economy hit a wall towards the end of March. Other indicators that give a true picture of the economy have also suffered a reversal, for example, rail freight traffic, electricity production and industrial profits."

This 'real data' is "wholly consistent with a hard landing", Scott continued. China's exports have been hit by the eurozone shambles, while domestic consumption has also taken a knock.

As in any boom, nobody can be sure. Optimists can point to the government's ability to stimulate the economy through fiscal and monetary policy, Scott said.

China's central bank has already started, recently launching its first combined deposit and lending rate cut since 2008.

China saved the world once, but can it save itself?

Watch out!

If it can't, your portfolio will be in the firing line, and not just any funds or stocks you hold directly in China. A Chinese hard landing will also put the skids under a host of UK-listed companies, starting with mining giants such as Anglo American (LSE: AAL), BHP Billiton (LSE: BLT), Kazakhmys (LSE: KAZ), Rio Tinto (LSE: RIO) and Xstrata (LSE: XTA). Engineers such as Weir Group (LSE: WEIR) will suffer. So will oil majors such as BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB), and smaller explorers such as Tullow Oil (LSE: TLW).

Standard Chartered (LSE: STAN) has weathered the banking crisis better than any UK-listed institution, but it may not stand so firm in a China crisis. HSBC (LSE: HSBA) may also take a hit (as will all the big banks).

A host of other companies may also be forced to slow their plans to expand eastwards, including Aviva (LSE: AV), Reckitt Benckiser (LSE: RB), Rolls-Royce (LSE: RR), Tesco (LSE: TSCO), Unilever (LSE: ULVR) and Vodafone (LSE: VOD).

Given the size and nature of these FTSE 100 (UKX) companies, anybody holding a UK tracker or equity income fund will be hoping the Chinese have got their arithmetic right.

Crash landings

There will also be safe havens. The emerging world is likely to smoke their way through their troubles, which is good news for British American Tobacco (LSE: BAT) and Imperial Tobacco (LSE: IMT). Pharmaceutical giants such as GlaxoSmithKline (LSE: GSK) and Astrazeneca (LSE: AZN), and stalwarts such as SSE (LSE: SSE) and National Grid (LSE: NG) may also survive the crash.

That China hard landing may never come, but if it does, please don't say nobody saw it coming.

Let me finish by adding that more share ideas can be found within "Top Sectors For 2012" -- a Motley Fool study of three favourable sectors that could offer potential opportunities for long-term investors. The report is free.

Further investment opportunities:

> Harvey owns shares in BHP Billiton, BP, Royal Dutch Shell, Aviva, Vodafone and GlaxoSmithKline. He does not own shares in any of the other shares mentioned in the article. The Motley Fool owns shares in Standard Chartered and Tesco.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Erling2000 21 Jun 2012 , 12:58am

Found this article very helpful - currently hold SSE, VOD, TSCO and Av out of the companies mentioned. Would be interested to know where Diageo fit in in all this?

mrburns2050 06 Jul 2012 , 9:11pm

I own Diageo think people will continue to drink though. to quote Home Simpson "here's to alcohol: the cause of, and solution to, all of life's problems"

One a serious note. Im wary of mining stocks don't want my income cut or reduced when there are steadier areas of the market out there. Would creat a fantastic buying opportunity.

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