UK stocks most vulnerable to China slowdown

Long-running concerns over China's economic slowdown have left exposed stocks looking rather bruised. Although most reckon China's economy will slow at a safe rate relative to inflation and employment, in the event of a hard-landing, there will be pain. For the cautious investor, Citi Research has identified 48 companies most vulnerable to any further stuttering.

Remaining one of the major risks to the global market, growth in China has lost momentum as the region rebalances from investment and manufacturing towards consumption and services. Analysts at Citi reckon aggressive policy changes should stabilise growth in the second half, especially in the manufacturing sector. The renminbi's depreciation should also provide some support.

Brave contrarian investors looking for exposure to the region should go directly to Chinese-listed stocks, advises Citi. But for concerned investors, Citi has built a screen of vulnerable large-cap non-commodity stocks that generate around 30% of their sales from the region. With most of the 48 stocks from the Semiconductor, Technology, Capital Goods, Chemical and Auto sectors, there is a "clear" cyclical sector tilt, say the analysts.

From the UK, banking groups Standard Chartered and HSBC made the screen, joined by commercial services group Intertek, luxury goods label Burberry and semiconductor firm ARM Holdings.

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With over a third of both banks' sales generated in China, Standard Chartered has lost 8.3% of its value in the year-to-date, followed by HSBC, which has lost 7.1%. Around a quarter of ARM and Burberry's revenue is generated in China, with the region making up a fifth of Intertek's sales. The microchip company and fashion label have lost 7.7% and 9.2% of their value respectively, but Intertek has grown 14%.

Previously, investors weren't concerned the falling appetite for iron ore and copper would be mirrored in demand for smartphones and handbags, as Citi's 48-stock index "handsomely" outperformed commodity stocks. But this strong performance has skidded to a halt as fears over the wider economic slowdown creeped into investor sentiment. After dropping 10% since June, Citi's screen has fallen 2% in the year-to-date - underperforming the MSCI World ex-Commodities and MSCI World indices.

Unfortunately, this market sentiment reflects fading earnings momentum, so the stocks don't look particularly good value. After outperforming the MSCI World ex Commodities and MSCI China from 2012, since February 2015 the 12-month forward earnings per share (EPS) forecasts are down 6% for the screen. Recent depreciation means further downgrades could be on the cards, warn the analysts.

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"More contrarian value investors would presumably want to see our screen trading at a reasonable discount before dipping a toe," said the analysts. "Our screen still looks very expensive compared to the MSCI China index at a Forward PE of 9.1x."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.