Crash in Chinese consumer stocks points to darkening economic outlook

BEIJING – Covid restrictions have curbed spending in China’s vast consumer market, turning some popular retailers and automakers into inventory delays.

Covid-Zero China did not see a spike in pent-up demand. Instead, uncertain growth prospects combined with record-high youth unemployment led consumer discretionary stocks in the MSCI China Index to underperform a wider gauge this quarter. This is in stark contrast to his double-digit rise in the global consumer index.

Investors see little prospect of a near-term recovery in Chinese consumption. In addition to lockdowns in major cities, health officials have tightened travel restrictions ahead of national holidays and stepped up efforts to tackle Covid-Zero as his two important party conventions approach in 2010. I’m here.

Crystal Chan, head of investment specialists at Principal Asset Management (Asia), said: “People are starting to cut spending again. I do,” he said. “This is a major threat to the Chinese economy, which is why we are avoiding some of the consumer arbitrary names in our Asian portfolio.”

The MSCI China Consumer Discretionary Sub-Index fell more than 14% in the quarter, catching up with the benchmark’s 12.6% loss. Worst performers were luxury toy retailer Popmart International Group, which fell more than 50%, and luxury car dealer Zhongsheng Group, which fell more than a third of his.

In China, retail sales have contracted from a year ago to July, in contrast to a pre-pandemic growth rate of around 8% or more. Consumer confidence remains well below the 100 threshold, indicating pessimism prevails.

The US consumer market, the world’s largest, remains an important market for investors, but the push for broader policies to promote equality and discourage extravagant wealth is another factor complicating investment decisions. In a speech earlier this month, President Xi Jinping urged people to “avoid overconsumption” and “glorify frugality” in a new greener way of life.

“People are no longer networking directly, so they are downgrading their consumption of apparel, expensive watches and luxury handbags. No wonder,” said Paul Pong, managing director of Pegasus Fund Managers. Told. “They are more than happy to buy cheaper brands.”

Amid the overall weakness, investors see a silver lining in companies responding to the so-called “consumption downgrade” trend by selling cheaper products.

Pinduoduo, which offers more discounts through a group-buying model and targets customers in lower-tier cities, surged nearly 40% last month, making it the biggest gain on the gauge for any Chinese stock traded in the United States. rice field.

Gian Si Cortesi, investment director at GAM Investment Management in Zurich, said: “In general, we are very selective with consumers, avoiding mid-range brands with weak value propositions and low brand awareness. We have exposure to Pinduoduo and Vipshop,” he said. Online discount retailer.

Indeed, the market potential remains strong given China’s burgeoning middle class and the potential for a surge in consumption once pandemic restrictions are lifted. HSBC expects China to maintain its position as the world’s largest consumer market over the next few decades, with a growing upper middle class earning more than US$50 a day.

But Covid restrictions and policies promoting equality remain the main risks for investors.

“Simply put, China cannot count on a consumption-driven recovery,” said Raymond Yang, chief Greater China economist at Australia & New Zealand Banking Group. “In the long run, ‘common prosperity’, ‘profit sharing’ and reward caps will hit high-end consumption. The luxury segment will hit.” Bloomberg