Mark Williams

Shopping for Chinese consumer stocks

Mark Williams

The West is gearing up for its annual consumption binge, kicking off in America with Black Friday – the post-Thanksgiving phenomenon which marks the start of Christmas shopping season – on November 24th. On the other side of the Pacific, China has just held its own yearly festival of consumerism: Singles Day.

Here in the UK, John Lewis’ Ad and its ensuing hullaballoo try to create the illusion that the retailer has a central role in Christmas traditions, but in China the inextricable link between Singles Day and its leading e-retailer, Alibaba, is very real.

Shopping for Chinese consumer stocks - Singles day

Although thought to have originated as a student event in the 1990s, Alibaba has co-opted Singles Day for its own commercial gain to the extent that it has trademarked “Double 11”, expressing the 11 / 11 date as an ‘anti-Valentine’s’ celebration of singledom. The company estimates that it generated US$25.3bn in sales from the event this year, over 90% of which were transacted on mobile devices. This is over three times the combined online sales from last year’s Black Friday and Cyber Monday in the US, according to estimates from Adobe.

Shopping for Chinese consumer stocks - Online sales value

Consumption growth in China and the wider Asian region represents a big investment opportunity for us. Although lofty valuations and lack of dividend yields reduces our appetite for investment in some of the higher profile e-commerce names, there are lots of companies generating earnings growth from the region’s growing middle class which also pay dividends. The Liontrust Asia Income Fund’s direct exposure to such stocks (classified as Consumer Discretionary by the MSCI) stands at over 20% following the latest addition: China’s JNBY. A significantly greater proportion of the Fund is indirectly exposed to regional consumption.

These companies include businesses involved in clothing, autos, casinos & resorts, textiles and furniture, many of which are based in China. Our positive view on China’s consumers is one side of a core portfolio theme which we have been applying for a number of years now – target the winners in a time of economic transition. As China weans itself off its pursuit of growth, which often encouraged excessive investment in inefficient industries with over-capacity and falling returns, the country’s personal consumptions continues to grow at a double digit rate. This in turn provides equity opportunities for the Liontrust Asia Income Fund.

Evidence that the Chinese government’s attempts to rebalance its economy are working come from its economic statistics – consumption accounted for 65% of growth in the first nine months of 2017, up from 60% in 2015 and 45% in 2010, contributing 5.3 percentage points to the headline figure of 6.8%. We are also finding more anecdotal sources which point to progress in this rebalancing.

It is in this latter bracket that I’d place the reaction to China’s recent lack of clear official economic growth targets. We know that it is targeting “around” 6.5% GDP growth in 2017, a downgrade from 2016’s 6.5% - 7.0% target range.  We also remember that back in 2012 a target was set to double 2010 GDP by 2020. But at the last month’s National Congress, a twice-a-decade event, no mention was made of a new official growth target. In past years, this would have been the key takeaway from such events: how much growth are Chinese officials targeting? And to what extend do we trust their statistics and targets?

That the absence of an official growth target should cause barely a murmur of concern suggests that the subordination of short-term growth to longer-term economic transition is now taken as a given. And this is a key point. China’s need to affect a deceleration in its economy is now old news, and it seems that this message has largely been accepted – both by investors and by Chinese authorities who are resisting the temptation to prop up short-term growth through more inefficient investment.

So although the Chinese economy is decelerating, the investment opportunity is expanding and consumption growth remains stable. At the same time, one needs to avoid the areas which are negatively affected by the macro deceleration. By maintaining this simple focus – selecting the areas which benefit from transition while avoiding those that suffer – we believe we can find ample investments for the Fund which show the desirable characteristics of growth in earnings and dividends.


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Friday, November 17, 2017, 8:57 AM