China-linked assets pricing in weaker economic activity?

Recent Chinese data persistantly reflects slowdown of its economic activity. IF China's growth slows down further to 6% in 2016, it would be difficult for China-linked asset prices over 2016. Underlying GDP growth in China could also be lesser than expected.

"According to our regression framework, the most sensitive assets to a 1pp China slowdown are copper (-6pp), gold (-2pp), material equities (-2pp), EM equities (-2 to -4pp in local terms), EM currencies (-0.5 to -2pp), commodity FX (-1pp), and EM corporate credit (+17bp)", says Barclays in a research note. 

Weaker growth of the country could also benefit the core bonds, especially the long end of the curve.

China-sensitive assets' underperformance leads to the doubt that if they are already in a weaker pricing activity. If the asset performance is compared over the last year to that implied slower China growth and the controls, the residuals will be helpful in assessing the growth backdrop and if China-linked assets are effecting it.

Most of the China-sesitive assets are vulnerable to the losses which are renewed, due to their better performance, which include copper, gold, EM equities in local terms, IDR and Em corporate credit, which are not necessarily cheap and in some cases, they are still costlier.

For instance, the copper and gold prices in real terms are well above the pre-super cycle averages and many China-sensitive currencies are fairly overpriced like CNY, AUD, NZD, SGD, 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 energy and materials credit spreads have risen by much more than earnings yields.

"We recommend being short copper, short gold, long UST flatteners, long USD/CNH, and long USD/AUD. In credit, we recommend being long US over EM corporates and, selectively, long materials and energy credits (rather than equities)", added Barclays.