Trading China's Slowing Growth
Analysts the world around have been highlighting the continued deceleration in Chinese growth, adding to the ongoing debate of whether China will experience a soft or hard landing. Proponents of the soft landing theory see growth bottoming out near current levels, whereas those forecasting a hard landing believe things could get much worse.
In the chart above shows, Chinese GDP and Chinese Manufacturing PMI have largely moved together over the last five years, with the PMI being a leading indicator for GDP growth. Currently, the PMI reading is hinting at a continued deceleration in growth, after a brief uptick earlier this year. It seems as though global events, including the European debt crisis, are affecting China and suggesting that there may be more downside to growth ahead.
Investors who believe that China will continue to slow may look to shorting copper or copper stocks. Copper is tied to global growth and, as the chart above shows, Chinese growth. The price of copper moves in line with Chinese GDP growth, so a further slowdown in China would drive down copper and copper stocks. Investors could look to short either Freeport-McMoRan Copper and Gold (NYSE: FCX) or Southern Copper (NYSE: SCCO), as they are largely exposed to market prices. Also, for those with access, consider just outright shorting copper. Some could short the metal through an ETF such as the Global X Copper Miners ETF (NYSE: COPX).
Gold is a good hedge against a Chinese slowdown for a few reasons. First, gold has consistently moved higher over the last five years or so, whereas Chinese growth has been volatile. Also, owning gold will hedge against central bank liquidity aimed at boosting growth. Thus, investors should consider adding gold either via ETF's such as the SPDR Gold Trust (NYSE: GLD) or by trading the actual physical metal. For those who choose to trade the physical metal, look at going long gold against some currency other than the US dollar, either the euro, the pound, or the yen.
According to the above chart, gold in all sorts of currencies has moved higher over the last five years. Some investors simply just want to hedge away dollar exposure, and so they may find that hedging against the yen is safer. Going long the XAU/JPY cross (gold priced in yen) could be used to hedge out the dollar. Investors can also apply other views here, for example a bearish euro thesis. If an investor is bearish the euro, then going long the XAU/EUR cross makes sense. However, if an investor expects more easing from the Bank of England, consider going long the XAU/GBP cross to short the pound before it weakens.
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