How Can You Profit From a Correction in China?
Last week, China reported a sharp drop in imports. Weak import data from China rekindled fears that a slowdown will pull the stocks in the emerging markets lower from their two-month high levels. The slowdown also revived the fears that the country will report a very weak third quarter next week. China’s economic growth is expected to drop to 6.8% for the first time since the global financial crisis in the third quarter.
China’s government has taken several extreme measures to counter the recent crash. However, historically whenever the government has tried to intervene a crash, the end results have been way worse.
Thomas Schroeder, the analyst who accurately predicted a rebound in Chinese stocks wouldn’t last, recently said the benchmark equity gauge will fall to lower levels once the bear-market rally fails. According to Bloomberg, Schroeder stated:
“The Shanghai Composite Index will climb to 4,100 in the next three months before slumping as much as 41 percent to 2,400 in early 2016, Schroeder, the Bangkok-based founder and managing director of Chart Partners Group Ltd., said in an interview in Singapore.”
Given the volatility, I think investors should use this as an opportunity to short the stocks with huge exposure in China. The companies that rely heavily on China for sales will suffer due to the economic slowdown. The expected crash will also give investors the opportunity to buy great stocks at a beaten-down valuation. So in my opinion, instead of being afraid of a crash, investors should hedge against the bear market by having about 40%-50% of their portfolios short with companies with heavy exposure to China.
Many stocks in China are currently in bubble territory, so a huge correction can’t be ruled out. A crash in China will have a negative impact on stock markets across the globe. Thus, shorting in the present market is important to hedge against a market crash.
There are many stocks that will move downwards if China reports a weaker-than-expected economic slowdown. However, the ones I would recommend investors to short are Sina Corporation (SINA), Las Vegas Sands (LVS), Dangdang (DANG), Alibaba (BABA), Marvell Technology (MRVL), Cheetah Mobile (CMCM), Yum! Brands (YUM) and QIHOO 360 (QIHU).