NEW YORK (TheStreet) -- Slower economic growth for China will make U.S. companies less competitive, fund managers warned, as concern on the outlook for the world's second-largest economy rattles markets.
This is expected to cap gains for U.S. equities in 2014, with many investors questioning when the five-year bull run will come to an end.
A stream of disappointing economic data from China so far this year makes it unlikely the nation will hit its 7.5% GDP target in the first half, though a stimulus package or monetary easing is anticipated to boost growth in the latter part of the year. From a fiscal perspective, Chinese Premier Li recently noted that further Chinese defaults were inevitable, sparking fears of worsening balance sheet issues.
ING U.S. Investment Management's head of international equities, Martin Jansen, described the investment that developed nations have sunk into China as "massive", citing U.S. multinationals such as General Motors (GM - Get Report) and Caterpillar (CAT - Get Report). China is estimated to be a $300 billion market for U.S. firms, with General Motors selling more cars there each year than in the U.S. since 2010. Boeing (BA - Get Report)has also predicted that over the next 20 years to 2032 China will buy 5,580 new commercial airplanes with a total value of $780 billion and be its largest commercial client outside the U.S.
For investors with a longer-term view, sitting tight may be a wise strategy. But in the short- to medium-term, "investors may want to trim stocks when exposure (to China) is excessive and if a stock is richly valued," Jansen said in a phone interview. He advised against indiscriminate selling of companies exposed to China, noting the impact of slower economic growth would be far more muted for U.S. stocks than those with direct investments.
More broadly, slower growth for China spells a lower yuan. This would make Chinese exports more competitive, placing U.S. goods at a relative price-disadvantage in the global marketplace. Cuttone's senior vice president, Keith Bliss, said he expects this dynamic to be more significant for U.S. stocks than any fall in demand for goods from Chinese consumers.
Less demand from China will also slow global import and export growth generally, Meridian Equity Partners senior managing partner, Jonathan Corpina, added. China is the largest trading partner for the U.S. after Canada, and its biggest source of imports. Economists pointed to China's impact on emerging-market currencies and the global financial system as further reason for concern if its growth rate slows dramatically. But few expect a so-called 'hard landing' for China, suggesting authorities will act wherever possible to hit GDP targets.
For those still bullish on China's longer-term prospects -- and brave enough to invest directly -- fund managers advocate a stockpicker's approach. "We can find good companies benefiting from tourism, Internet/ecommerce, and health care growth," Mirae Asset Global Investments portfolio manager Joohee An told The Street.
She said larger constituent sectors such as banks and commodities were expected to show slower acceleration, as authorities focused on "higher quality" growth. "Even though the overall economic growth rate may slow down, this huge economy is still growing at decent level and some underpenetrated sectors in particular are growing a lot faster," An added.
-- By Jane Searle in New York.