“But I don’t own any Chinese stocks!” many individual investors moaned late in the afternoon of Monday, October 26th, “So why has the value of my portfolio dropped?” That’s a reasonable question for investors who have prudently purchased high-quality U.S. stocks, only to see the prices of those stocks fall because of a broad decline in a far-away market they’ve chosen to avoid.
Even an investor choosing to take on only the risk presented by NYSE-traded stocks, however, is exposed to events in other markets. As a practical matter, “the stock market” is not a building on Wall Street at the corner of Broad but a world-wide agglomeration of securities exchanges. Investors feel most the events which occur on their own exchanges, but they feel to some degree events on all exchanges.
The Chinese stock markets’ 22% drop in three days in the last week of October reflected a long string of adverse events exacerbated by recent, intermittent, ineffectual, and at last abandoned attempts by the Chinese government to steady those markets. The impact of that drop was felt in other countries’ securities markets. Developing nations were hurt worst, and may experience more pain if the drop heralds a slow-down in the broader Chinese economy.
U.S. exports to China are only about 1% of our GDP. Several developing economies, however, are significantly dependent on exports to China. Neighboring South Korea and Vietnam send 26.1% and 11.8%, respectively, of their total exports to China, particularly sophisticated technology products. The impact of problems with the Chinese economy is not limited to East Asia. Brazilian exports to China of minerals, soybeans, iron ore, crude oil, and poultry in the first seven months of 2015 were 20.0% of Brazil’s total exports and had fallen 14.0% year-over-year. Even the German economy reports the impact of lower Chinese imports of machine-tools, with Chinese companies buying fewer or cheaper units, and orders by Chinese start-up businesses all but vanishing in the first half of 2015. The Australian economy is dominated by a very large services component, so the economy depends on its mining industry (only 7% of GDP) to address its consistently negative balance of trade. Coal exports absorb 73% of total Australian coal production, with almost all of that sent to industrialized East Asian countries. BHP Billiton, Australia’s largest company and the world’s largest mining company, reported an 86% drop in profits in the first six months of 2015 as coal exports diminished and coal prices fell.
An American investor may have experienced some indirect impact of the recent, dramatic drop in the Chinese stock markets, and further declines in the prices of U.S. stocks may result from a slow-down in the Chinese economy. Those effects, however, will be minor and indirect compared to those looming for Chinese investors and for shareholders in other countries with export-dependent economies. Still, market and economic events in China and other countries will unavoidably affect U.S. investors. As Vanguard founder John Bogle has often said, U.S. investors don’t need to bother to invest internationally: including both offshore subsidiaries and export/import activities, U.S. companies already provide their shareholders with participation in foreign economies.