Fathom's China Exposure Index (CEI), which monitors the relative stock market performance of US-listed firms with significant revenue exposure to China, has plunged after the signing of the phase one trade deal and coronavirus outbreak in the country. The downward move suggests a much broader stock market selloff could be ahead.
Fathom created CEI using the top 25 US-listed corporations that derive at least 15% of their revenues from China, and the weight of these firms is proportional to the share of their revenues that are derived in the country.
As shown in the chart below, CEI fell after the signing of the phase one trade deal between the US and China. It declined even more, as the coronavirus outbreak in the country led to the creeping economic paralysis that risks a hard landing. At least two-thirds of China's economy has ground to a halt, many firms have already shuttered manufacturing plants and closed retail stores across the country.
And what does this all mean? Investors are now de-risking their portfolios of US-listed firms with the most significant revenue exposure to China. The reason: these companies will likely see depressed business activity in 1Q and lead to terrible earnings ahead.
A plunge in the CEI has usually been seen as a leading indicator, suggesting that a much broader stock market correction could be around the corner.