(January 8, 2013) — Investors have not fully realised the extent to which a “hard landing” in China is still on the cards – nor what it would mean for their portfolios, a leading bank has claimed.
Analysts at French bank Societe Generale published a note today claiming investors’ worst case scenario is dramatically underestimated and a hard landing is more likely than most believe.
The bank’s China specialist believes there is a “non-negligible risk” of a hard landing by the world’s second largest economy this year, even though it has slipped down investors’ list of concerns. The Chinese economy is still imbalanced, the bank notes, as it relies too heavily on investment to fuel GDP while its net exports have fallen steadily since 2008.
The note said: “More than two thirds of the respondents [to a client survey] believe that in the worst case, Chinese growth would be between 5.5% and 7%…if investment simply stays unchanged, growth will mechanically drop to 4%. The collapse in confidence would further cut growth to 3%. Less than 5% of our survey respondents expect growth to be below 3.5% in the worst reasonable case.”
In December, the monthly Bank of America Merrill Lynch survey showed investors had record levels of bullish sentiment towards a Chinese recovery.
The American bank said a net 67% of respondents believed China’s economy would strengthen in the coming year, up from a net 51% in October. It added that a net 38% of asset allocators were overweight emerging market equities, double the level of September’s survey.
However, this morning’s note by Societe Generale warned investors that few asset classes were safe, should China fulfil its downward potential. It predicted global growth would fall from 2.7% to 1.1% due to the knock-on effect from the Asian giant’s tumble.
“China accounts for roughly 40% of base metal consumption, and Chinese demands supports oil and gold prices too…a Chinese hard landing would lead to a 50% drop in base metals and a 30% fall in Brent prices,” the note said.
Societe Generale’s commodities specialist said that although gold might bounce, the inclination towards the precious metal by Chinese savers would mean any rally would be short-lived.
The analysts also foresaw a strengthening of the US dollar, should China’s economic tumble be worse than most are predicting. The dollar would rise against all major, local Asian and emerging market currencies, despite monetary easing action by the Federal Reserve.
Equities would be hit around the globe, the analysts said, with H shares – Chinese listed companies – dropping up to 50%. The bank’s survey revealed investors’ worst scenario was a 30% slump. European shares could drop 20%, the bank said, with emerging markets suffering at the hands of an investor sell off.
Finally, the bank recommended investors buy good quality debt, rather than high yield fixed income and prepare for steeper credit curves.
To read the full report, click here.