China assets priced in lower growth

China's latest data continue to show slowing economic activity. A further slowing in China growth to 6.0% in 2016 would be a headwind for China-linked asset prices over the next year. Barclays' economists' alternative activity indicator suggests that underlying GDP growth in China could be 50-150bp lower than reported.

Barclays further estimates sensitivities to China growth for a wide range of assets by regressing y/y changes in asset prices on our alternative China growth indicator, controlling for global growth (equities or VIX), the USD and US 2y yields, where appropriate. We exclude services activity from the growth indicator to capture the sectors that drove China's boom and are slowing much faster, notably investment and manufacturing. 

Many China-sensitive assets are vulnerable to renewed losses, as they have performed better than Barclays' model predictions. These include copper, gold, EM equities (local terms), IDR and EM corporate credit. Such assets are not necessarily cheap, either, and in some cases are still expensive. Real copper and gold prices are still well above pre-super cycle averages, and many China-sensitive currencies are still over- or fairly valued (CNY, AUD, NZD, SGD, RUB, etc). 

EM equity valuations are relatively cheap, but the headwind from slower China growth is notable and EM FX is still an overhang. EM corporate credit versus US IG relative spreads are back to average levels, suggesting China risks are not fully priced. However, a number of high yielding EM currencies have already been hard hit and valuations are already cheap for idiosyncratic reasons (BRL, MYR, COP, ZAR). DM equities and credit are less sensitive to China, but we find that energy and materials credit spreads have risen by much more than earnings yields.

Therefore, Barclays' analysts recommends being short copper, short gold, long UST flatteners, long USDCNH, and long USDAUD. In credit, we recommend being long US over EM corporates and, selectively, long materials and energy credits (rather than equities).