China’s consumer stocks face lost decade

DOMESTIC DRAG: Retail sales barely grew, while property weakness and muted stimulus left staples earnings far below forecasts as Beijing focuses on the AI boom

In the shadow of Beijing’s single-minded focus on artificial intelligence (AI), China’s consumer stocks are trapped in a lost decade.

The industry is showing a stark contrast with the high-flying tech sector. MSCI China’s consumer goods sub-indices plunged roughly 18 percent over the past six months to near 10-year lows, while the AI-heavy technology gauge surged to more than double its 2016 level. During the latest earnings season, consumer staples firms in the MSCI gauge missed profit expectations by nearly 50 percent.

The malaise reflects China’s lopsided economy, where Beijing’s drive for tech supremacy has fueled an export boom and funneled capital into AI firms with limited spillover to domestic demand. Last month’s retail sales crept up just 0.4 percent, and there are few signs that investor pessimism toward the sector will ease after the Golden Week holiday — a crucial period for travel and spending.

An AI sign is seen at the World Artificial Intelligence Conference in Shanghai in 2023.

Photo: Reuters

“Data this summer has disproved that there is any recovery in spending, and affirms that it still is a one-way bet on exports,” Shanghai Jade Stone Investment Management Co (上海謙璞投資管理) fund manager Chen Shi (陳實) said. “From a market perspective, that has created a crowding-out effect. Investors have become increasingly concentrated in AI beneficiaries, while sectors such as consumption have been sold indiscriminately.”

The sour mood marks a dramatic reversal from the pre-COVID-19 pandemic years, when the rise of China’s middle class was celebrated as one of the world’s most compelling growth stories.

That optimism has all but evaporated as a protracted property slump, sluggish income growth and a crisis of consumer confidence have made the sector a losing bet. A drip feed of policy support over the years to revive housing sales — a key pillar for spending — has fallen short. The latest data showed property prices extending their slide.

Authorities could rebuild consumer confidence through measures from stabilizing asset prices to creating stronger wage growth prospects and raising minimum income, Chen said, adding that any meaningful improvement will likely be be gradual.

Weak consumer demand emerged as a recurring theme during the latest earnings season. Shede Spirits Co (捨得酒業) described the sector as being in a “deep adjustment,” while department store operator Nanjing Central Emporium (南京中央商場) flagged softer visitor traffic and lower spending. Top liquor maker Kweichow Moutai Co’s (貴州茅台) first-half net profit dropped.

Earnings for consumer staples firms in the MSCI China gauge fell 47 percent short of expectations in the latest season, while those producing discretionary goods missed by nearly 10 percent, data compiled by Bloomberg showed. In contrast, industrial and tech companies delivered upside surprises.

The sector’s woes are unfolding against a global backdrop in which investors have shunned consumer shares for beneficiaries of the AI investment boom, Bank of America head of Asia-Pacific equity strategy Winnie Wu (吳馨怡) said. For China, domestic policy headwinds including tighter tax rule enforcements also create a heavier financial burden for both households and businesses, she said.

To be sure, depressed valuations and light positioning might rekindle interest in consumer shares if market volatility returns, as was briefly seen during July’s global tech rout. Still, Beijing’s reluctance to use aggressive stimulus to encourage more consumer spending will likely weigh on the sector for now.

“China’s consumer stocks lack a compelling catalyst amid a protracted economic slowdown,” said Shen Meng (沈萌), director at Beijing-based investment bank Chanson & Co (香頌資本). “In the long term, I see stronger growth opportunities in technology, while consumer shares will likely remain caught between weak fundamentals and capital flowing elsewhere.”