Markets: Eyeing China's market sneeze

In the mind of an international investor based outside Australia, it’s all about China for stocks Down Under. That’s at least the perception of State Street Global Markets, who aren’t exactly gung-ho about the China story. State Street may have a point. Chinese investors aren’t exactly brimming with confidence about their own markets.

Hong Kong’s stock market, home to China’s largest company by market value, PetroChina, is the second worst performing developed market in the world this year, down 5 per cent. The Shanghai market has performed even worse, down 7.4 per cent in 2013. Plainly, State Street Global Markets Asian head of sales, trading and research Jeremy Armitage told Markets Spectator local Chinese investors have lost confidence in their own markets, and more tellingly the health of their economy.

Chinese and foreign investors may be of the same mind when it comes to Chinese stocks. They are now following breathlessly any news on the much maligned lending for real estate development in the world’s most populous nation. Foreign fund managers are afraid that these loans for hotels, leisure facilities and housing – often ventures between local governments and builders – are a tsunami of non-performing loans that will overwhelm the balance sheets of Chinese financial institutions particularly if state-owned enterprises struggle as growth slows.

So if China sneezes will Australian stocks catch a cold? After all, the world’s second-biggest economy is the biggest buyer of Australian exports. From 2011 to 2012 China accounted for 27 per cent of the total value of Australia’s exports of goods and services, according to a research paper by the Australian National University.

Still, a Chinese virus may not necessarily affect Australian shares. Amid the poor performance of the Hong Kong and Shanghai stock markets, the S&P/ASX200 Index has done quite well thank you very much. Australia’s benchmark index has gained 9.4 per cent this year. Some of the market’s biggest stocks have domestically focused businesses, notably the four-biggest banks, which saved them in the wake of Lehman Brothers’ bankruptcy.

Investors recognise this. In part, because bank stocks – their dominant franchises that are primarily focused on Australia – have gained this year. Commonwealth Bank shares are up 16 per cent this year. Westpac’s stock has added 19 per cent.

As markets continually discount events ahead of time, it is not as though the potential machinations in China’s economy have not wound their way into the share prices of mining stocks. BHP Billiton’s shares are down 6.2 per cent this year. Rio Tinto’s stock has fallen 12 per cent.

State Street’s Armitage says there is global rotation by stock investors out of value and into growth. That may help shares of biopharmaceutical manufacturer CSL and online job site Seek. Many of the world’s stock markets, including Australia, may continue to benefit from low interest rates and perceptions of a future pick-up in growth. That makes some more confident about their estimates for company earnings growth even if Australia’s reporting season has hardly bolstered confidence that 2014 will be a better year.