When the Chinese stock market began imploding in August, U.S. markets sold off sharply as Wall Street struggled to process the logic behind the move and how it would impact American business.
Chinese stocks are the obvious investment to avoid in the wake of this volatility, but by no means are they the only victims of the market meltdown. In fact, the biggest losers in this global tragi-comedy may very well end up being foreign countries not named “China,” and foreign companies not based in the Orient.
These seven handpicked investments are each at risk of plunging even further as China struggles to get a handle on its economic troubles.
Forget China stocks — stay away from these poisonous investments, too:
Forget China Stocks: 7 Investments That’ll Crash Next: iShares MSCI Brazil ETF (EWZ)
The iShares MSCI Brazil Index (EWZ) is the biggest ETF tracking Brazilian stocks, and it is put in a rather tough spot by the Chinese stock market’s recent underperformance.
The fact that Chinese stocks could continue to slump may ultimately impact China’s consumer spending, which could further decelerate the economy.
But the real issue for Brazil is its reliance on China as a trading partner.
China intentionally devalued its currency in August, and put further pressure on the yuan by lowering its reserve ratio and slashing interest rates. Brazil is a leading exporter of iron and soybeans to China, and a weaker yuan makes those dollar-denominated commodities more expensive for Chinese importers. Perhaps even more troubling for Brazil, whose sovereign debt was just downgraded to “junk” status, is potentially softer demand from China if its economy continues to drag along.
Market Vectors Brazil Small Cap ETF (BRF) could be in even more trouble than EWZ, since it tracks more volatile, less stable, small-cap companies in an already struggling economy. This tiny fund sits at at just $63 million in assets under management to EWZ’s $1.8 billion.
Forget China Stocks: 7 Investments That’ll Crash Next: iShares MSCI South Africa ETF (EZA)
South Africa, all things equal, will also suffer from China’s woes. Heck, here in the U.S. we learned the Chinese stock market is anything but insular as the S&P 500 fell a whopping 9% in a week’s time.
South Africa is far more susceptible to China than the U.S., mostly because it exports a ton of natural resources to its Asian trading partner. This exposure has caused the South African rand to plummet, and some market watchers have even called for the Johannesburg Securities Exchange to set daily limits on how much traders are allowed to withdraw.
iShares MSCI South Africa Index (EZA) is an ETF that tracks publicly traded South African companies, and likely will take a hit if the Chinese economy and/or Chinese stock market continues to suffer. The market cap-weighted index is already down 10% in 2015 already — and more pain’s likely on the way.
Forget China Stocks: 7 Investments That’ll Crash Next: iShares MSCI Malaysia ETF (EWM)
One of the few countries as exposed to China as South Africa and Brazil is Malaysia, a truly emerging economy that’s been growing by leaps and bounds recently. In fact, Malaysia has been a true economic all-star in the region of late; gross domestic product grew by 4.7% in 2013 before speeding up to 6% GDP growth in 2014.
Unfortunately , the first half of 2015 has seen a mean mean reversion. Q1 saw GDP growth just slightly below what the country experienced in 2014, as the economy grew at a 5.6% clip. But Q2 confirmed the slowdown was happening with rapidity, as 4.9% growth confirmed investors’ fears.
That slowing growth is a big reason iShares MSCI Malaysia ETF (EWM) is down 24% year-to-date, and the recent shenanigans with the Chinese stock market are a big reason EWM will likely continue to fall.
Malaysia’s economy is largely driven by its oil exports, and given the fact that China by itself imports 14.4% of all oil shipments in the world each year, softer demand from a weakening Chinese economy will materially impact Malaysian companies.
Forget China Stocks: 7 Investments That’ll Crash Next: BHP Billiton (BHP)
Unfortunately for countries like Australia, it’s not just the Chinese stock market that suffers when China stocks take a bath. When the Chinese stock market started crashing in August, it put the world on notice: Not only is the world’s second-largest economy having problems, but the markets are choosing to acknowledge that now, in the most public way possible.
While a dearth in Chinese demand will certainly impact the entire Australian economy, it will be Australian miners that take the brunt of the pain. And that means the Melbourne, Australia-based miner BHP Billiton (BHP) is in for a rough time.
BHP doesn’t discriminate much when it comes to what it mines for. If it’s below the earth and you can sell it, BHP will probably sell it to you. Its core segments, however, are petroleum and potash, copper, iron ore and coal.
That’s rather unfortunate for the company, since China accounts for 58% of the world’s iron ore imports yearly and 31% of the globe’s copper ore imports as well.
Forget China Stocks: 7 Investments That’ll Crash Next: Rio Tinto (RIO)
Although BHP Billiton faces significant threats from the downturn in China stocks, it’s not the only miner caught between a rock and a hard place. After all, with such a large percentage of metals and minerals going straight to China, producers can only sit back and cross their fingers, hoping the Chinese slowdown isn’t as bad as expected.
London-based miner Rio Tinto (RIO) is just such a proverbial finger-crosser. In a frank statement to investors upon the release of its first-half 2015 results, RIO admitted that the Chinese stock market collapse was shaking things up:
“Global macroeconomic risks have also added to short-term volatility, and China’s equity market correction and Greece’s debt negotiations have resulted in concerns of financial markets impacting commodity trading.”
It has been a rough 2015 for Rio Tinto, to say the least. The current scenario is the worst of both worlds for global miners reporting their results in dollars, as slumping commodity prices compound the negative effects of a strengthening greenback.
With major operations in Australia, South Africa and Canada, Rio Tinto lamented that the U.S. dollar had strengthened by between 11% and 14% year-over-year against each currency, reducing earnings by $847 million in 1H 2015.
RIO’s earnings from iron ore — an essential component in the steel China’s using to build infrastructure — fell 55% in the first half of the year.
Forget China Stocks: 7 Investments That’ll Crash Next: Las Vegas Sands (LVS)
The deceptively named Las Vegas Sands (LVS) is almost entirely reliant upon China for its revenues. That’s a shame, because, as the recent Chinese stock market implosion showed, China’s a bit of a mess.
The revenue from Las Vegas resorts and casinos are negligible when compared to the properties LVS controls in Macau and Singapore: U.S. operations accounted for just 13.6% of revenues in 2014; around 66% of revenue came from Macau and the rest came from Marina Bay Sands, its casino and resort in Singapore.
Not only is the Chinese middle class unwittingly discovering that it was gambling in the Chinese stock market without having to travel to Macau, but the Chinese government has been cracking down on corruption, money laundering, and other shady practices. That’s bad news for the casinos, which have seen an exodus of the all-important VIP traffic as the high rollers stay away from the heat.
The government’s plan to ban smoking in casinos also isn’t great news for LVS and other Macau operators. After all, who doesn’t want to smoke and lose money at the same time?
Forget China Stocks: 7 Investments That’ll Crash Next: NQ Mobile (NQ)
Alright, so maybe don’t forget China stocks entirely. NQ Mobile (NQ), the Chinese application software company, still has plenty of room to fall.
One of the common gripes about the Chinese stock market is that investors can’t trust any economic metrics that come out of the country. What’s true on a broader level also appears to be true on a micro level, particularly as it concerns NQ Mobile.
The NQ stock price has been trending lower since October 2013, when short seller Carson Block of Muddy Waters Research accused the company of lying about its reported cash balances. Trading near $25/share at the time, shares of NQ Mobile now go for just $3.50 a pop.
Being invested in the Chinese stock market in any shape or fashion today is a profile in courage, but investing in Chinese stocks with longtime allegations of fraud plaguing their reputation?
That’s a profile in stupidity.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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