MOO VanEck Agribusiness ETF

II - China - 031512

Three Ways to Play China’s Hard Landing

Like it or not, China’s economy is slowing.  Whether or not it’s a sharp dramatic downturn or slow deterioration in growth is certainly up for debate.  In either case, China’s slowing imports (and exports) will have potential domino effects across much of the world, with Europe and the U.S. being susceptible at an already fragile time in all of our economies.

The most recent data is pointing more towards the former and even if the communist country is able stave off a serious decline in GDP growth or worse contraction, I think most will agree that there will be industries and companies that will suffer even in a normal decline.

A Changing Climate
As the world’s second largest economy, China has quite a bit of clout when it comes to fueling or smothering global trends.  They are also the world’s most inhabited nation dwarfing the US populous by over 1 billion people (est).  The social trends of 1.35 billion people can have serious influence on everything from the prices of food, goods and technology to the profits of major corporations.

China’s recent growth and social evolution has especially driven demand and prices of commodities from corn to steel.  They have also been a bullish catalyst for the production and prices of electrical, mechanical and farming machinery in the past years. 

In many instances, their immense consumption expansion has had a compounding effect of sorts;  first driving the price of commodities like corn higher, which in turn creates more profitable crops for farmers here in the U.S., motivating them to buy new more efficient equipment, equating to a  positive earnings effect on companies like Caterpillar, Bunge, Monsanto and more.

As growth slows and demand wanes, prices of the goods and commodities that China consumes are likely to see a price reduction.  This is where you may be able to profit.

Agriculture
China has over 300 million farmers and ranks #1 in worldwide farm output.  They grow all sorts of crops from rice and wheat to potatoes, tea, cotton and more.  Output of all of their major crops has risen in the past 20 years and more recently fruits, meats and grains have really taken off.

China does have a problem with water for its crops and according to several sources is in danger of depleting clean water from its aquifers for crops but also the pollution caused by farming.  Solutions are more efficient farming techniques and equipment as well as an increase in imports of food.

China’s changing appetite for proteins has had dramatic effects on their meat and grain consumption, but if the country were to slip into recession, that demand would quickly dry up and force commodity prices lower. 

A way to play this would be to short or buy puts on the Market Vectors Agribusiness ETF – (MOO).   MOO gives you exposure to a plethora of agriculture related companies like DE, POT and more.

Oil
Much of oil’s recent run-up is due to potential supply issues and has little or nothing to do with demand.  If China were to experience a hard landing, there is a good chance we would see both West Texas and Brent Crude take a hit.  Even an orderly slowdown in the world's most poplulated country would help push oil prices lower.

To play oil to the downside, you could short or buy puts in the US Oil Fund ETF (USO).  USO is not an investment that you want to hold long for a while due to its negative monthly roll yield.  This negative roll yield is caused by a normal “contango” in oil futures, where longer dated futures cost more than short term futures.  Taking a short position in the USO is just fine.

Steel
According to the Financial Times, China’s demand for steel has soared over the past decade, with annual growth averaging 15%, which now accounts for more than 40% of global steel production.  They are also the world’s largest consumer of iron ore and account for 60% of all the steel traded globally in 2011.

Just last year China saw steel demand growth drop to 8% and many analysts are expecting more dramatic slowdowns to be announced.   A dip in Chinese consumption would not only adversely affect steelmakers and miners like ArcelorMittal (MT) and BHP Billiton (BHP), but also the coke and coal miners like AK Steel (AKS) and others (several of the producers like MT and X also have coke plants) who supply the steelmakers

The reality is that all these industries have been preparing as best they can for China’s growth to slow, but if China experiences the hard landing that many experts believe is likely, the preparation will only mitigate the inevitable reduction in profit for these companies.   

 Jared A Levy is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Whisper Trader Service.

 

 
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