From Forbes a few weeks ago but apposite today:
1) Australian banks. Mining contributed 50% of Australian GDP growth in 2012 and that’s set to slow sharply. A China downturn would send that contribution into negative figures and that’s a big deal when mining contributes about 9% to GDP. The Aussie banks are exposed to this slowdown, are among the most expensive banks in the developed world and have huge exposure to a mammoth property bubble which has ironically been driven by Chinese buyers of late. Commonwealth Bank (ASX: CBA) is the most expensive bank in Australia and probably the most short-able.
2) China property developers. Given the risks to the bursting of the investment bubble, the good times for property developers are unlikely to last. State-owned China Resources Land (HK: 1109) appears one of the most at risk.
3) The Chinese yuan (vs USD). This will surprise many people given the yuan strength in 2013. However, the yuan is overvalued in my view and highly vulnerable to a downturn in the economy. Moreover, there’s the added issue of yen depreciation which has to provoke a reaction from other prominent exporters, such as China, at some point.
4) Fortescue Metals. This Australian iron-ore miner is near 52-week highs as the price of iron ore has recovered nicely. But iron ore and steel are highly vulnerable to a China downturn in investment. Fortescue (ASX: FMG) isn’t cheap, has high leverage and is therefore probably the best short in the iron ore space.
5) The Aussie dollar. Yes, the Aussie has pulled back a long way already. This could well be a market signal of trouble in China, by the way. But whichever metric you use, the Aussie remains overvalued and would end up much lower should a China downturn eventuate. The Australian central bank talking down the currency is an additional negative factor.
Three out of five are Australian shorts!
