The picture Fitch has just painted of businesses with outsize China exposure shows credit analysts are painfully aware of the nightmares that might await lenders if the mainland's economy stalls. Why then are equity analysts so keen to keep investors in dream land?
Companies in the Asia-Pacific region could find their creditworthiness under significant strain if growth in China freezes up, the ratings company said in a new report. The most vulnerable industries are steel, shipping, chemicals, mining, and oil and gas.
By its own admission, Fitch considers it unlikely Chinese expansion would collapse to just 2.3 percent between 2016 and 2018, sharply lower than the 6.3 percent economists polled by Bloomberg currently expect for 2017.
But even if such an unpleasant crash landing sounds way too far-fetched for now, credit analysts are at least discussing the risk. By contrast, stock pickers are largely shrugging off the broader regional consequences of even a less bumpier touchdown. The rout in commodities, not to mention the creeping depreciation in the yuan over the past four months, is evidence enough of weakening Chinese demand. And yet, while there's justifiable anxiety in Asia about the impact higher U.S. interest rates will have on rolling over foreign-currency debt, the bigger risk of a severe and protracted Chinese slowdown is getting the short shrift.
Of the 772 large and medium-sized publicly traded mining, steel, shipping, chemical and oil and gas companies in the Asia-Pacific region, 39 are rated by analysts and also disclose their exports to China to be at least one third of their revenue. The consensus expectation is for a 46 percent jump in their shares on average within the next one year, despite an 8 percent decline in the previous 12 months:
But to believe a company like BHP Billiton, whose Australian-listed shares are down 40 percent this year, is somehow on the cusp of a 43 percent surge is to heroically assume that risks to the miner around the price of iron ore are already priced in.
While it's true that Asian equity indexes outside of China have fallen between 1.5 and 5 percent this month, extending their declines for the year, there's still the prevailing sense China will overcome its momentary difficulties and all will be rosy for the region's miners, shippers and energy and metal exporters. Presumably, smaller players, the kind Rio Tinto CEO Sam Walsh says are "hanging on by their fingernails," will drop out, and survivors will hit the pause button on capital expenditure to preserve dividends. But that's only going to transfer the pain to equipment vendors and engineering and construction firms -- and their shareholders.
Credit markets seem to be much more on message. A Bank of America Merrill Lynch index for Asian high-yield dollar notes is down more than 1.6 percent this month. With the turmoil in global junk bond markets gathering pace, it's possible December will prove to be a worse month for investors than even August, when China roiled markets by devaluing its currency.
Hope does spring eternal on equity sell-side desks. But in the present instance, if the optimism proves to be irrational, the disappointment could be crushing. For now, it might be hard to quantify what may happen to Asian corporate earnings, dividend distributions and share prices if China's economy does come to a skidding halt and if a weakening yuan robs rival Asian nations of competitiveness in export markets. What is certain however is the less fearful stock analysts are about the growing stress in bond and loan markets, the more scared investors should be.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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