Last week proved a rocky one for U.S. equities, with many investors placing the blame squarely on China. In an attempt to stem the country’s slowing growth (still reportedly 7%, mind you) Chinese policy makers took the unexpected step of slashing their currency’s value twice in as many days.
A new note from Citi (C) Research outlines several big name companies from around the globe with significant revenue generated in China. Here in the United States, the list is topped by Wynn Resorts (WYNN) with 76% exposure in China thanks to its resort in Macau. Yum Brands (YUM) is also near the top of the list with 52% exposure to China, and Apple (AAPL) is a bit further down the list at 24%.
In Europe, companies like Volkswagen (50%), BMW (35-40%) and Burberry (23%) also make Citi’s list.
While the potential for China to become a contagion still exists, Citi thinks things will settle down in the second half.
Citi economists think growth stabilisation in 2H is possible given aggressive policy support. They forecast two more interest rate cuts (25bp each) and five more RRR cuts (50bp each) by mid-16. Growth stabilisation should be seen in the manufacturing sector which has suffered from overcapacity, excessive leverage and weak demand. RMB depreciation should help to relieve some of the pain.
Citi economists still see China achieving a soft-landing, although the markets are increasingly concerned that something worse may occur. Fears about the ongoing economic slowdown have been enhanced, not reduced, by the recent policymaker actions. A soft landing for China should be manageable for the world economy and markets. A hard landing could be painful.
For the bravest of investors, Citi says to look to Chinese stocks directly rather than playing with global names that have that high level of exposure.