Investors Punish U.S. Companies Vulnerable to China Slowdown

(Bloomberg) -- In the wake of Apple Inc.'s revenue warning, investors are finding that exposure to China is not all it's cracked up to be.

The unexpected revision late Wednesday is weighing heavily on China-exposed companies across sectors that have already been struggling to cope with trade war uncertainties. To top that off, Kevin Hassett, chairman of the White House Council of Economic Advisers, cautioned Thursday that more U.S. companies can be expected to lower earnings forecasts as the softer Chinese economy cuts into their sales.

A potential slowdown in China has been an overhang on investor sentiment for a while now, and intensified this week after key manufacturing data showed factory conditions there slumped in December. Apple conceded that it failed to foresee the “magnitude of the economic deceleration, particularly in Greater China.” Other bellwether companies that have also warned about a deteriorating economic environment in the country include U.S. delivery firm FedEx Corp., coffee giant Starbucks Corp. and jewelry retailer Tiffany & Co., as well as German automaker Daimler AG.

Caterpillar Inc. and Boeing Co., two companies that have borne the brunt of trade-related uncertainties and negotiations, both closed down nearly 4 percent on Thursday. Other notable names in the sector with sizable China exposure include Deere & Co., Emerson Electric Co., 3M Co. and Honeywell International Inc.

Auto parts suppliers Delphi Technologies Plc, BorgWarner Inc. and Lear Corp., which also have a big chunk of their sales coming from China, sold off sharply. And technology stocks were in a free fall, with the S&P 500 Technology Hardware & Equipment Industry Group Index closing down as much as 7.9 percent, with big drops in Western Digital Corp. and Amphenol Corp.

Separately, in another move that could be symptomatic of tighter operating conditions for businesses and companies, the U.S. issued a travel advisory Thursday urging increased caution in China, saying the country often uses its authority to prohibit American citizens from leaving.

As investors seek solace amid the broader sell-off, they are pouring into defensive sectors such as real estate and utilities. Weyerhaeuser Co., Ventas Inc., American Water Works Co. and Southern Co. were all higher.

U.S. stock market sectors with the highest exposure to China include technology, energy, industrials, consumer staples and consumer discretionary, according to a JPMorgan note that was published in July 2018.

Thursday's doom and gloom aside, international companies with China exposure have actually been doing better than their global peers overall since November, suggesting that investors are placing their bets on an economic rebound sometime in the not too distant future.

--With assistance from Brad Olesen, Felice Maranz and Janet Freund.

To contact the reporter on this story: Esha Dey in New York at edey@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Dave Liedtka, Andrew Dunn

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