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Moody's cuts China credit outlook: Stocks with most exposure

Moody's cut China's credit outlook to negative on rising debt, slowing economic growth, and risks in the nation's property sector.

Yahoo Finance Reporter Madison Mills joins the Live show to discuss the lowered outlook and what it means for U.S. stocks with the most exposure to China.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

SEANA SMITH: All right. Let's take a look at one of the other big headlines that we're following this morning. And more trouble for China. Moody's cutting its credit outlook for the world's second largest economy to negative from stable, citing worries about rising debt levels, persistently lower medium-term economic growth, as well as the downward spiral of its property sector.

Now, of course, this isn't too surprising maybe given that China's post-COVID recovery has been rocky, to say the least, with issues like a weakened consumer and high unemployment rate among young people impacting the recovery story there. It has also had an impact on some US companies with heavy exposure to China. And we have our very own Madison Mills here to discuss this.

And, guys, we're taking a look at this from a specific companies that are really at risk, when you talk about the slowdown that's happening right now with China. Maddie, I know you're taking a look here at some of those consumer facing names and specifically what's going on with some of these retailers.

MADISON MILLS: Yeah, I want to talk about Nike and LVMH to start things off. We know that the China story has come up a lot in their earnings calls, specifically here starting with Nike. In their most recent earnings, a little bit stronger of a report when it comes to the China story. With a brand like Nike, they're so big here in the United States. They've got to look to some of these emerging markets to continue to have that growth that the Street is going to be looking for on their earnings.

But as we've talked about many times, guys, this China story has not had the rebound of their economy that the Street has been looking for and that brands like Nike have been looking for. That might be one reason that we've seen the CEO visiting several times over the past six months.

And that's also why this downgrade, when you think about the earnings stories that we've been covering, it might make sense to some investors, right? Because we've seen this slowdown and this push for more stimulus. We have seen some stimulus to these local governments, as Beijing does push for a little bit more of this recovery.

They're looking to double their GDP by 2035, guys. And so potentially this downgrade might be a push to Beijing for more of that stimulus, which could potentially be a boon for some of these consumer names.

BRAD SMITH: Yeah, absolutely. I mean, we're going to be looking as well at Tesla here. You've been keeping an eye on this one and what could mean for the automotive sector.

SEANA SMITH: And a lot of it ties back to what Maddie was just saying just in terms of the weak consumer right now. People thinking twice before making those purchases. And when it comes to LVMH, you can categorize a lot of those purchases are pretty big purchases. Buying a car is a huge purchase. And we're starting to see the fact that the recovery has been much slower than maybe initially anticipated. Has started to weigh on Tesla's results.

And we're just getting out here this week, the latest data when it comes to sales in China. And this was out from the-- let's see here-- when it comes to the sales falling just about 18% in November. The recent data from the China Passenger Car Association. So falling nearly 18% in November on a year over year basis.

Why this is so significant is that we know Tesla needs China to be successful in terms of their sales there to really drive some of that market share, drive some of their revenue, their gains and going forward. They get about 20%, and that has historically been about 15%, 20% of the revenue relies on Asia. So the fact that they are so heavily reliant on one region of the world obviously really points to the fact that we are seeing any material weakness there. It's a little bit worrisome for Musk and for the company.

We know Elon Musk recently paid a lot to sit down and speak with Xi Jinping at APAC not too long ago. So we know that he has been really driving some of the pricing war that has been playing out over in China, very focused on the region, doing everything they can to boost sales there.

BRAD SMITH: Yeah. I've got two names that I'm looking at with regard to this and the Moody's cut out of China here specifically. I'm going to go unsexy and then we'll go sexy with Apple. The unsexy one, which, I mean, for a lot of construction files out there, Caterpillar is still pretty sexy. But at the end of the day, you're taking a look at the pre-market move. It's down by about 3/10 of a percent.

Moody's actually expects the property sector to remain smaller in proportion to the entire economy than it was before the property correction that started in 2021. As a result here, this could directly impact construction here, and especially when you look at the different markers of land sales revenue that accounted ultimately for about 37% of their revenue, excluding transfers from some of the central government there in 2022.

But at the end of the day, the land sales, the construction on top of those land sales as well and what this means more notably for some of that commercial property where the development is set to take place that could directly impact a company like Caterpillar that's already seen some weakness in its construction industries. In the most recent quarter, you saw a move lower by about 8% in that construction industry segment here.

So that's one area that I'm going to be watching. I'm also going to be watching closely Apple. Any time you hear for a call like this, and for Moody's what they're essentially looking at in the consumer profile within this region, they're looking at disposable income as well. Now, of course, you might be thinking, well, I need my smartphone. I sleep next to it every night, as anybody around the world probably does.

But at the end of the day, the propensity to upgrade your phone becomes less likely if you're taking a look at some of those household expenditures in this region and saying, all right, well, why would a consumer want to spend up or want to get at least the higher models that are out there and introduced into the market most recently in September, and now making their way into hands and phones and, perhaps, your bed as well in these past few weeks and months here. So Apple is one that I would also be keeping a close eye on.

IDC had projected that they were going to see their highest market share at about 19.9% by the end of the year for their operating system here internationally. And so this call from Moody's certainly puts that perhaps back in focus for some investors.

SEANA SMITH: Yeah, it does. And I think it's almost across the board, right? We can sit here and list a long, long list of companies that have heavy exposure to China. We didn't get a chance to talk about Starbucks, we didn't get a chance to talk about a lot of these consumer facing names that they have focused their growth plans on this region. The fact that this recovery has been so slow, it could be a real hurdle, at least in the short term.

BRAD SMITH: That's bad news for the brand of the green siren at the end of the day perhaps here. We're going to be watching. Maddie, thanks so much for taking the time joining us here this morning to break this all down.