Late last week a preliminary survey of Chinese factories showed that manufacturing activity shrank for the first time in seven months after both new domestic and export orders fell. Fears of an accelerated slowdown once again shook the markets as a slew of banks, including Bank of America, BNP Parabas, Credit Suisse, and ING, revised growth estimates to just above 7.5%. The slowdown is being driven by severely diminished wage growth, slowing global demand, and the Chinese government starting to tighten its wasteful spending policies. All eyes are on the government’s growth target of 7.5% for this year, as growth hasn’t fallen below this level in over two decades. In this brief article, I will highlight a few names vulnerable to an accelerated slowdown.
Like the coffee, Starbucks Corporation (NASDAQ:SBUX) has taken a bold approach to its Chinese expansion. The company has aggressively grown its store base to meet the rising caffeine demand in the region. By 2015, it is expected that there will be over 1,500 Starbucks Corporation (NASDAQ:SBUX) locations in 70 different cities, making China the second largest market for the company. Should we continue to see weak economic data, price to earnings multiple contraction would be likely in the short term. The company has done a good job diversifying its growth in Asia by recently focusing greater attention on its Thailand and Vietnam markets. The company recently opened its flagship store in Ho Chi Minh City, which was received with huge demand. As a result the company is looking to establish a strong presence in the country’s metropolitan areas.
Las Vegas Sands Corp. (NYSE:LVS) owns and operates an array of luxury casinos in the heart of the Macau district of China. Up to this point, the gambling numbers out of Macau have remained stable, but going forward all eyes will be watching for hints of a meaningful slow down. The company does draw a chunk of its revenues from the country’s VIP patrons, but the mass market does remain a key component for sustained growth. However, positive revenues have started coming out of the company’s Las Vegas properties in tandem with the economic recovery here at home. This unexpected growth and following profits may cushion the impact of slowing growth out of China.
In 2012, Yum! Brands, Inc. (NYSE:YUM) saw 42% of its profits come from its Yum! Brands, Inc. (NYSE:YUM) China operations. In recent years the company has drastically expanded its operations to meet the demand for its KFC and Pizza Hut products. Should we see wage growth falter further, fears of a revenue slowdown from this region should surface. With a relatively high price tag, consumers will turn to cheaper alternatives. Chinese consumers have already cut back as a result of safety scares earlier this year, so it will be interesting to see if the cutback is exasperated as a result of the slowdown.
The Chinese government is shifting its focus from investment spending into services spending to drive future growth. The EGShares China Infrastructure ETF (NYSEMKT:CHXX) is likely to tumble should we see the Chinese government pull the rug out from under the infrastructure sector. This fund is heavily weighted in industrial and basic material stocks, which would perform poorly as spending shifts to the services sector. Along the same lines, as a result of decreased infrastructure spending in China, the demand for copper would falter. Currently, 40% of the global copper demand comes from China’s industrial activity. Look for shares of the iPath® Dow Jones-UBS Copper Subindex Total Return ETN to trace falling copper prices. This fund is designed to provide investors with exposure to the Dow Jones-UBS Copper Subindex, which reflects the returns that are potentially available through an un-leveraged investment in the futures contracts of copper. The shift in industrial spending would be an effort to sustain the reasonable growth rates over the long term.
Should we continue to see an economic slowdown in the region, the above stocks should see weakness. Consumer discretionary stocks will be drawn down by decreasing wage growth and tighter monetary policies. The industrial and material names should falter as the government shifts spending from the infrastructure industry into the services sector to promote longer term growth.
The article Stocks to Watch on a Chinese Slowdown originally appeared on Fool.com.
Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Nathaniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.