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How China’s troubled economy could hurt your investments

The current state of China’s economy is facing significant challenges. This development bears negative implications for the performance of US stocks, and thus, it may have adverse effects on the composition of your investment portfolio.

What’s going on: According to the National Bureau of Statistics of China, there was a further deceleration in Chinese consumer spending, industry production, and investment in long-term assets (such as property, machinery, or other commodities) in July compared to the corresponding period of the previous year.

The issue of youth unemployment in the world’s second largest economy has consistently reached unprecedented levels. Earlier this week, the decision was made by Beijing to postpone the release of the monthly data entirely.

The escalation of tensions between the United States and China has become increasingly apparent, as these two global economic powerhouses find themselves at odds on various fronts, including trade policy, technology, and the recent Russian incursion into Ukraine.

President Joe Biden has issued an executive order that imposes restrictions on United States investments in sophisticated technology sectors within China. The directive elicited concerns among fund managers over the optimal investment strategies to be employed in the nation.

In a recent development, a Congressional committee has disclosed its intention to conduct an investigation into BlackRock, the foremost global asset manager, and MSCI, a prominent provider of index funds. The objective of this inquiry is to ascertain whether these entities have engaged in investments in Chinese companies that have been subjected to blacklisting by the United States government due to concerns pertaining to security and human rights.

Why it’s important: According to Alex Etra, a strategist at Exante, China’s economic expansion has significantly influenced the global economy for the majority of the past two decades. This implies that in the event of a deceleration in China’s economy, there will be a corresponding deceleration in global economic growth.

A deceleration in global economic growth typically has adverse effects on US equities. A contributing factor to this phenomenon is the direct exposure of sales made by US corporations in China, coupled with China’s significant role as a consumer of commodities.

According to the speaker, organizations that do not engage in direct sales to China are still influenced by the outcomes that occur in the Chinese market. According to Etra, it is suggested that ExxonMobil (XOM) has limited business engagements with China. However, in the event of a deceleration in Chinese economic expansion, it is anticipated that this might lead to a decline in oil prices. They have accomplished this exact action within the past week, seeing a decline of approximately 5%.

The painful area is: American companies operating in China face potential losses if the Chinese economy continues to decline. Prominent corporations such as Apple (AAPL), Intel (INTC), Ford (F), and Tesla (TSLA) maintain substantial manufacturing connections with the nation. Companies such as Starbucks (SBUX) and Nike (NKE) heavily depend on Chinese consumers for their business operations.

In the preceding year, Bank of America conducted an analysis to identify the S&P 500 corporations that possess the most significant level of involvement with the Chinese market.

Las Vegas Sands (LVS) ranked first on the list. The casino corporation obtains 68% of its revenue from the Chinese market and has experienced a decline of approximately 10% in its stock value throughout the preceding 30-day period.

The semiconductor company Qualcomm (QCOM) exhibits a significant level of exposure, up to 67%, to the Chinese market. On Wednesday, the shares of the company had their lengthiest consecutive decline in over four years, resulting in a nearly 11% decrease over the past 30-day timeframe.

Tesla, Intel, Nvidia (NVDA), Wynn Resorts (WYNN), and MGM Resorts (MGM) were identified as part of the group of 25 S&P 500 businesses that possess a significant level of involvement with the Chinese market.

The market is already retreating: According to data from PitchBook, private equity and venture capital investments in the United States experienced a decline last year, reaching the lowest level in eight years, and this downward trend persists.

Prominent hedge funds such as Scion Asset Management, led by Michael Burry, Moore Capital Management, Coatue, D1 Capital, and Tiger Global, have notably reduced their investments in Chinese companies during the second quarter of 2023, as indicated by recent filings with the Securities and Exchange Commission.

In 2022, the global population of millionaires decreased by 3.5 million.

The previous year proved to be unfavorable for the top 1% of the population. The occurrence of inflation and the increase in interest rates coincided with a significant decline in financial markets, resulting in a reduction of wealth for certain individuals within the ultra-wealthy segment. According to my colleague Allison Morrow, there was a fall in overall family wealth, marking the first instance of such decline since the global financial crisis of 2008.

According to the annual global wealth report by Credit Suisse and UBS, there was a 2.4% decrease in the aggregate value of private wealth worldwide, amounting to $454.4 trillion in the previous year. A significant percentage of the aforementioned outcome can be attributed to the negative performance experienced in both stock and bond markets, which has a disproportionate impact on individuals with higher levels of wealth.

The analysis discovered that the increase of 3% in global median wealth in 2022 indicates that it may not necessarily be considered unfavorable. This metric provides a more significant measure of the well-being of the average individual.

However, the depletion of wealth among the upper echelons of society has resulted in a reduction of almost 3.5 million individuals classified as millionaires compared to the previous year of 2021. Nevertheless, those with a net worth of at least one million dollars continue to be part of a substantial cohort, as their global population amounts to over 60 million.

Aldi acquires 400 supermarkets from Winn-Dixie and Harveys

The German multinational grocery corporation, Aldi, has successfully established its presence across several regions of the United States, and is currently expanding its operations towards the southern states.

On Wednesday, Aldi made an announcement regarding the acquisition of Winn-Dixie and other grocery shops in the Southeast. This strategic move aims to enhance Aldi’s market presence within the region.

According to Jason Hart, the CEO of Aldi USA, a considerable number of Winn-Dixie and Harveys stores will undergo conversion to Aldi’s minimalist store format in the future. However, it is worth noting that a portion of the approximately 400 Winn-Dixie locations that Aldi is acquiring will retain their recognizable red-and-white Winn-Dixie branding and conventional store layout.

Aldi has formulated a comprehensive strategy to extend its presence throughout the United States. As part of this strategy, the company has already disclosed its intention to inaugurate 120 additional stores, with the ultimate objective of reaching a total of 2,400 stores by the conclusion of 2024.

According to Hart, the Southeast region plays a significant role in our nationwide growth plan. Indeed, the aforementioned focus on growth had been a fundamental aspect of our program even prior to the acquisition, rendering it an ideal convergence of several variables.

According to my colleague Ramishah Maruf, Hart further said that the acquisition might potentially present a real estate leasing prospect for Aldi. This is due to the fact that Aldi stores typically necessitate only approximately 50% of the square footage typically required by conventional grocery stores.

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