For most of the Spring/Summer, the Shanghai composite was banging along 5 and half year lows, hovering above 2000:
And then this happened. The index rose 50%:
If you just came here from another planet and on that planet increasing stock prices were reflective of improving corporate earnings and broad economic growth, then you would likely think that the Chinese economy was humming. But if you are like me and born on this planet, you know it’s possible for stocks to go higher when economies are getting worse as it means stimulus or accomidative monetary policy may be right around the corner.
The truth is, the economic data out of China has been poor and the country is dramatically scrambling to stabilize their economy at GDP levels far above the rest of the world, but well below the pre-financial crisis highs close to 13%:
So for those looking at the performance of stocks in Shanghai to get a sense for the health of the Chinese economy you are on the wrong indicator. But you don’t have to look far as a handful of U.S. stocks that get either a good bit of their sales, or expected growth from the country.
Here is the poster-child in my opinion, Wynn Resorts (WYNN). WYNN gets more than two thirds of their sales from Macau. WYNN shares have had a precipitous drop of late, down 26% in just the last month, down 29% on the year, and down 47% from the all time highs made in early March:
I know there are some regulatory things going on there. And there has been some one-off situations that have caused decline in volumes. But in general, the high rollers have disappeared and analysts have been slashing forward estimates. In the West we are used to the high rollers being the “last men standing” but that doesn’t seem to be the case in China. Does that have anything to tell us about the upper end of the Chinese economy? Those with assets?
If we go into a global recession, the price action in a stock like WYNN in 2014 will have been the canary in the coal mine.
But it’s not just the high rollers who have pulled back in China. We have seen disappointing commentary from MCD & YUM on the consumer side in just the last week, while industrial companies like CAT and JOY have all seen a down-tick in demand from emerging markets like China and have seen their stocks quickly retreat towards the 52 week lows.
So the take-away here is simple, don’t take you cue on the health of the Chinese economy from the strength in the Shanghai Composite. It’s merely a central bank play at this point. The results from U.S. multi-nationals with exposure in China have been a lot more accurate in detailing the health of the region. A the moment that grade looks like something in the C family. We’ll see what the next semester brings.