China won't take down US stocks: Analysts
Dramatic headlines on China's stock market and economic slowdown are a negative weight but aren't likely to push U.S. stocks into a correction, analysts say. (Tweet This)
The more than 10 percent plunge in the Shanghai Composite this week has put pressure on U.S. equities though they were mixed Tuesday, after a selloff Monday. But whether it's the 5 percent intraday swings in Chinese stocks or disappointing economic reports, analysts say the turbulence is just part of growing pains for the Asian giant as it progresses towards a more consumer-oriented system.
"There has never been a single instance of China triggering a U.S. bear market," Thomas Lee of Fundstrat Global Advisors said in a note Tuesday. He pointed out that the Shanghai Composite spends 63 percent of months in a bear market since 1990 while the U.S. is in a bull market 81 percent of the time.
On the economic front, the bear market in commodities and the indicates more of a slowdown in manufacturing than a decline in national growth. The commodities selloff has raised concerns about a global growth slowdown, as commodities dependent emerging markets economies and currencies are taking a hit, as well.
"I think we're missing a big picture on China by focusing on the old metrics," said Jeffrey Kleintop, chief global investment strategist at Charles Schwab.
"The areas of growth in China that we want to focus on are doing OK," he said. The new success stories in China like Alibaba center on the country's burgeoning middle class rather than the strength in exports that contributed to exponential growth in the last two decades.
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"The growth model that has served China over the 2000s is no longer that valuable," said Ben Mandel, global strategist at JPMorgan Multi-Asset Solutions.
The latest breakdown of Chinese GDP (from 2013) shows the service sector is now larger than the manufacturing sector, Kleintop said. The bear market in commodities also represents how China's manufacturing activities are slowing.
"I think China is more psychological than real in terms of its impact on the U.S. market," said Marc Chaikin, CEO of Chaikin Analytics.
In contrast to lower GDP growth in China—the IMF expects a decline to 6.3 percent in 2016—the United States is on track for a rise to 3 percent growth next year.
Those projections and generally improving economic data in the States set a backdrop for fair valuations in U.S. equities that many analysts believe could still rise in price.
"Ironically if the Fed decides to raise interest rates and the bias is, the economy is strong, after initial reaction … that could push the market higher because it would take uncertainty out of the market," Chaikin said. "It could be that's the stimulus needed to move the markets to new highs. The earnings aren't going to do it."
While the negative effects of the China slowdown are all over U.S. corporate earnings reports this season, Kleintop said those issues are due more to firms' structural issues than problems in China itself.
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Caterpillar attributed part of its 18 percent year-over-year decline in sales to the economic slowdown in China.
But Starbucks noted an 11 percent increase in China/Asia Pacific same-store sales, and Apple saw 112 percent year-over-year growth in the greater China region.
The gains for the two popular brands come as China attempts to shift from an export-focused, manufacturing base to a consumer-driven economy. That transition will likely cost the country a knock-down in its overall headline GDP figure, but analysts say the new kind of growth is more sustainable.
In a presentation two years ago about global demographics in 2030, the World Bank said it expects China to add about one billion people to the middle class. That demographic shift creates a large market for services that is growing but still largely untapped.
"There's still money to be made, not only in the consumer sector (but also in) financial services," said Mandel said.
Overseas, increased Chinese spending power translates into tourism growth and luxury spending. Analysis by Chinese data firm Wind Information found that consumption patterns rose regardless of stagnating GDP growth.
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And U.S. firms such as Starbucks and Apple stand to remain beneficiaries if they can continue to tap into those expanding wallets.