We've been worried about a hard landing in China for quite some time.
That used to be an unusual thing to fret about. Not anymore. Now everyone's worried about it.
A Chinese crash is the tail risk' that keeps today's fund managers awake at night, according to the most recent fund manager survey from Bank of America Merrill Lynch.
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Mining stocks have fallen hard, and the Australian dollar the currency of the most China-dependent developed economy has done likewise. Confidence in the US dollar meanwhile, is higher than ever before.
And that's got me wondering whether it might be time for a bit of a turnaround
The long America, short China' trade is getting crowded
But when you see that more than 80% of fund managers are bullish on the US dollar more than ever before in the history of the BofA Merrill Lynch survey of global managers you have to wonder if it's time for a breather.
Overwhelming bullishness on the US is being reflected in other popular trades too. A stronger US dollar will tend to be bad for gold, for example. Commodities are also out of favour, with an unusually large proportion of fund managers underweighting' the sector.
Even the rising bearishness towards China is partly driven by pro-US sentiment. It's not that easy for markets to keep more than one story in their heads at one time. China's gone from being the champion of global growth to a disappointment for investors who were bullish on it over the last few years.
Now they've returned to the old champion the US and all trades associated with China, from emerging markets to commodities, are being forsaken.
In short, being long the US and short China is becoming a consensus trade. And that's always worth questioning.
On the one hand, the US dollar may have hit a bit of a peak for now. Ben Bernanke is now very keen to reassure markets that he has no intention of raising interest rates or making monetary policy any tighter in the near future.
Improving economic data, of course, might persuade markets otherwise. But as investors become more upbeat on the US, it's also getting more likely that economic data will disappoint their raised expectations. So markets might well have got ahead of themselves on the long dollar' trade.
Meanwhile, the short China' trades have done rather well recently. The Chinese stock market recently hit a four-year low. Mining stocks have been punished too - the FTSE 350 mining index is currently at levels not seen since 2009. And today, the US press is full of China bear and famed short-seller Jim Chanos's latest target industrial equipment giant Caterpillar.
Now, I'm not saying Chanos is wrong. But when you've got all this high-profile bearishness, you have to wonder how many more potential bears can be left. I might feel differently if China's stock market was at an all-time high, or the mining sector was still popular. But that's far from the case. Anyone turning bearish on these sectors now is very late to the party indeed.
How to play a rebound in the mining sector
I'm not about to suggest you invest in China itself. China has lots of problems. And the Chinese government has lots of clever ways that it can try to fiddle its way out of these problems, or at least conceal them.
But if there's one asset class that the Chinese government couldn't give a damn about, it's the stock market. The Federal Reserve might panic when the Dow Jones sheds a few percent. But if a falling stock market was cause for revolution in China well, it would have happened by now.
Food prices they matter. Property prices they matter. Pollution, safety standards, corruption they all matter. The stock market is not a priority.
My point is, in this economy where virtually everything is run by the government, the welfare of foreign shareholders is almost meaningless. That's why I'd have very little interest in investing in China unless it was astoundingly cheap, which it's not.
However, mining is starting to look more interesting. The Blackrock World Mining Trust (LSE: BRWM) investment trust, for example, has fallen hard this year down nearly 20%. It offers a dividend yield of more than 4% and trades at a discount to net asset value (in other words, you are buying the shares for less than the value of the underlying assets). That looks like a good bet to me for anyone looking to play a rally in the sector.
Even more beaten down is the gold mining sector. The US-listed Market Vectors Gold Miners ETF (NYSE: GDX) tracks a US gold mining index. In November 2008, the ETF hit a financial crisis low of just below $18. It went on to hit a high above $65 in September 2011. Now it's back down to below $25.
That's brutal. There are few assets in the world that can boast of being back down at their financial crisis lows right now. At this sort of level, I think gold miners are worth a second look. If you agree, you could consider an ETF, or the Blackrock Gold & General Fund. And if you are particularly keen on the sector, you should take a look at what my colleague Simon Popple has to say. He's made a huge personal investment on what he calls gold's 'supply kings'. You can read his special report on this niche market here.
Metals and Miners is a regulated product issued by Fleet Street Publications Ltd.
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