Hong Kong, Australia stocks are vulnerable to China’s future
It is a fact that China’s economy is slowing down, which is best observed by its slowing exports. This has consequences and the two stock markets with the most direct exposure to China are Hong Kong and Australia. Both local stock markets have the highest concentration in financials (banks and property) among major global stock markets, with Hong Kong having more than 50 percent exposure to financials (see chart below).
The Australian stock market is also very heavily concentrated in materials (see chart below) which could pose a danger to Australian stocks if China's slowdown continues.
Neither has experienced a housing crash, like many other developed countries, and housing prices have just propelled higher (see chart below). High exposure to financials and materials in combination with hot housing prices are red flags.
If China's economy continues to slow down, commodity prices could be negatively impacted and hit the Australian stock market, which is heavily exposed to materials. This could also end the underlying support for house prices in Australia built on wealth from trading base metals with China.
In Hong Kong the impact is not severe through materials stocks, but rather through a slowdown in disposable income which could stop house prices from surging. We know from reports that Hong Kong's real estate market is overheating and making it difficult for ordinary people to buy a home. One of the drivers has been cheap credit as Hong Kong has long pegged its currency to the U.S. Dollar and thus imports U.S. monetary policy. Declining house prices would lead to pressure on commercial banks. Could home prices fall in Hong Kong? Sure, from 1997 to 2003 house prices in Hong Kong fell 25 percent following the Asian financial crisis, September 11 terrorist attacks and the SARS epidemic.
With between 50-60 percent exposure to materials and financials, the Hong Kong and Australian stock markets both are very fragile to adverse developments in China. As my colleague Tomas Beggren observed today, Chinese banks are already facing a credit bubble. My own view is that China is slowing towards a soft landing - the figures are not indicating a collapse like the one we observed back in 2008-09.