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How China’s Slowdown Impacts U.S. Stocks

A slowdown in Chinese imports may be bad news for U.S. companies that get a sizable chunk of their business from the world’s second largest economy, investing pros say.

Chinese imports grew 5.3% in March from the year before, less than expected and far short of the 39.6% growth seen in February, the Wall Street Journal reported. The drop is a sign that the Chinese economy is slowing, economists say, and that Chinese demand for metals, equipment and other goods will be more tepid going forward. “A number of US companies have become increasingly dependent on business [in China],” says John Lonski, chief economist at Moody’s Analytics. “And thus, as the rest of the world slows, these US companies have nowhere else to run.”

Certain sectors in the U.S. are especially vulnerable to the diminished Chinese trade. Many construction related companies may suffer if they can no longer offset poor demand in the U.S. by selling equipment and materials in countries like China, says Lonski. A drop off in Chinese demand for steel, copper and other metals could leave companies tied to mining especially weak, says David Abuaf, chief investment officer at Hefty Wealth Partners in Auburn, Ind. That includes the refiners that process metals and coal and the companies that produce vehicles used to transport those materials, he says.

The concern is that stock investors could see losses down the line. If demand from China wanes, some of these companies might see their inventories pile up and that can hurt profits, says Abuaf. Those companies might also have to cut production and lay off workers, he adds.

To be sure, some of the weakness seen in March is due to the unusually strong import growth that took place in February, meaning the overall impact to U.S. companies might be mild, says Abuaf. And China’s economy might get a boost from reduced inflation pressures, which could in turn help imports grow at a faster pace, says Jeffrey Bogue, a financial planner in North Berwick, Maine.

Investors worried about the slowdown in China may want to emphasize sectors that get most of their business domestically, advisers say. That includes utility companies and health care providers that are locally focused, says Abuaf. Regional and local banks, along with consumer discretionary companies such as retail and casual restaurants, also get most of their business domestically and are less directly impacted by economic conditions in China, says Tim Holland, a portfolio manager at Tamro Capital Partners, an investment advisory firm based in Alexandria, Va.

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