Which ASX-Listed Companies will Benefit from a Resurgent China?

There is an old saying that when the US sneezes Australia catches a cold, however, in recent times this has shifted as China has become increasingly important to Australia with many companies benefiting from trading with China.

It’s no secret that China’s real estate sector has been in trouble in recent years after experiencing over 20 years of property growth following the privatisation of property in the late 1990s. This was driven by urbanisation as millions of citizens moved from the countryside to the city. As demand grew, so did the size of property developers but the sector became overheated, which caused China’s second biggest developer Evergrande to default on their debt and seek bankruptcy protection in the US.

Is the worst over for Evergrande in China?

Australia and China share a close economic relationship, particularly with trading commodities. Given the role Australia played in the China property boom, the news about the impending collapse of Evergrande sent shock waves through Australia with fears that our market would crash.

Australia is one of the world’s biggest exporters of iron ore and China is the largest consumer of iron ore. A collapse in China’s real estate market leads to a fall in construction, which reduces China’s demand for steel and other resources including coal, copper, and aluminium, which is why Australia’s mining sector was impacted by the downturn in the Chinese real estate market rather than our property market.

With Evergrande back in the news, it is running into trouble trying to avoid a collapse, so is the worst over or is there still more to come? I believe it is the former as China has been aware of the issues with Evergrande and the challenges in the property industry for a long time. We know that it is always darkest before dawn, so is now the time to look at the ASX-listed companies that might benefit from a resurgent China?

We know BHP and Rio Tinto are major exporters of iron ore to China, which means any volatility in China’s construction and steel industries impacts their profits. The other companies that are also impacted include Fortescue Metals, South32, Evolution Mining and Sandfire Resources.

Right now, it is important to keep a keen eye on how Evergrande’s situation unfolds, as a sharp drop in demand from China could affect our miners and lead to a weaker Australian dollar. That said, the mining sector and others who export internationally will benefit from a lower dollar. Smart investors will be watching China closely because if the worst is almost over, this could be a time when opportunity knocks.

What were the best and worst-performing sectors last week?

The best-performing sectors included Energy up 1.98 per cent followed by Consumer Staples up 0.22 per cent and Healthcare up 0.15 per cent. The worst-performing sectors included Information Technology down 1.45 per cent followed by Real Estate down 1.17 per cent and Materials down 0.97 per cent.

The best-performing stocks in the ASX top 100 included Resmed up 9.26 per cent followed by Whitehaven Coal up 5.33 per cent and Reliance Worldwide up 5.14 per cent. The worst-performing stocks included Newcrest Mining down 8.61 per cent followed by Evolution Mining down 8.10 per cent and Atlas Arteria down 6.90 per cent.

What's next for the Australian stock market?

In stark contrast to recent weeks, the All Ordinaries Index has experienced a second week down. While the Australian market was only just in the red last week, this may be an early sign that the roller coaster ride of late may be easing. That said, while we should expect further falls, I believe the worst may be over and that the Australian market won’t fall much further. The good news is that last week the All Ordinaries Index did not fall below the low set the previous week.

As we move into October, many people believe it is the worst month in our market, but this is simply not true. Historically, the month of October tends to finish in positive territory, which is why I remain positive about the Australian market overall. That said, now is not the time to be complacent, especially as we move into the last part of the year, which historically presents the best months for growth in the stock market. As I continue to say, right now anything is possible in these current conditions, therefore, until we know when the current move-down is over, I recommend everyone exercise caution.

For now good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.