Here's what a worst-case scenario in China means for stocks

One of the leading concerns in the world right now is China and its decelerating pace of growth. Currently, China is growth at a 6.9% pace.

UBS’s base case is that growth slows to 6.2% in 2016 and 5.8% in 2017.

But some fear that that slowdown could become more sharp and sudden in what folks would characterise as a hard-landing scenario. UBS says this “extremely unlikely scenario” means real growth falls to 4%.

Here’s what the think it means for stocks:

Equities: No escape from de-rating even if revenue impact small

The revenue impact on the S&P 500 will be minimal, likely around 1% even if Asia Pacific (not just China) related revenues declined 20-30%. For this index 2016 earnings growth is likely to decline only from 5% to 3.75%. This isn’t true for Europe and Asia Pacific, where earnings are likely to drop 5-10% and 40% respectively. Higher credit spreads, and risk aversion will imply rising cost of equity, which should cause all markets to de-rate. MSCI World could drop 25-30% while the decline in MSCI EM should be around of 40%. There will be a lot of sector variation below these headlines, on which we provide detailed views at the end of this document.

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