(Bloomberg) — China’s once-powerful consumer is turning reluctant in the face of an economic slowdown, and the shift is particularly painful for luxury stocks.
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Shares in premium liquor maker Kweichow Moutai, luxury car seller Zhongsheng Group Holdings Ltd. and Nike distributor Top Sports International Holdings Ltd. have all fallen more than 10% this year against rising stock indexes. Analysts blame the slump on a trend of weaker consumption in China, evidenced by weak spending over the Dragon Boat Festival and signs of weakness from the ongoing 618 shopping festival.
Consumption remains sluggish despite Beijing’s efforts to stimulate spending, including by allowing trade-ins on home appliances and cars and easing rules on auto loans. Companies offering more affordable products are doing better than those at the higher end of the market, but doubts about the strength of China’s economic recovery have made investors wary of consumer stocks in general.
“The downward trend of premium stocks has not yet bottomed out,” said Xiang Xiaotian, director of Shanghai Chengzhou Investment Management Co. “Once the economy and property market start to stabilize in 2025, we will see some improvement.”
China’s luxury brands are struggling to craft a viable strategy to deal with an increasingly budget-conscious consumer appetite for better value, in stark contrast to a few years ago when the country’s burgeoning middle class was banking on increased spending expectations and driving luxury sales.
Shares of Kweichow Moutai, whose flagship baijiu liquor typically sells for more than 2,500 yuan ($344.58) a bottle, have fallen 9.9% in 2024, compared with a 3.2% rise in the CSI 300 index of mainland China stocks.Budweiser Brewing Co. Asia Pacific, which sells premium beer in China, has been one of the Hang Seng Index’s worst performers this year, along with Zhongsheng Group Co. Both have lost about a third of their market capitalization.
It’s not just local companies that are suffering: Some international luxury brands have been forced to offer steep discounts as spending in China slows.
Analysts at Jefferies Financial Group Inc. said sales of clothing and home appliances slowed in May even as retailers brought forward their 618 promotions. The brokerage also raised warnings about Nike’s China distributors Top Sports Co. and Pu Sheng International Holdings Co., saying the brand’s pricing strategy may be “too expensive” for consumers.
Traders are hoping for stronger measures to stimulate consumption at the Third Plenum in July, one of the country’s most important political events where top leaders lay out long-term economic plans and signal possible policy shifts. Data due next week could bolster the need for this after a Bloomberg survey showed retail sales rose a modest 3 percent in May.
The biggest catalyst for spending will be “the continued easing of real-estate measures and consumer stimulus measures,” said David Chao, a strategist at Invesco Asset Management in Singapore. The meeting could bring further announcements to boost sentiment, which could lead to an improvement in retail spending, he said.
While high-end brands have borne the brunt of the recent sell-off, consumer stocks have generally lagged the market recovery, with the MSCI China subindex of consumer staples down nearly 12% this year compared with a gain of more than 6% for the benchmark.
Strategists at UBS Group AG have shifted their investment preferences from domestic consumer stocks to semi-finances and real estate this month, citing sluggish income growth and rising utility costs.
Shares of PDD Holdings Ltd., one of the hottest investments in 2023, have fluctuated widely as its low-price strategy has garnered support, a sign that an escalating price war is unsettling investors.The company’s U.S.-listed shares have been volatile after surging 79% in 2023. Shares of Guangzhou-based discount retailer Miniso Group Holding Ltd. have been little changed in Hong Kong this year, despite plans to expand overseas.
“There’s a lot of uncertainty around the economic situation, so there’s a general wait-and-see mood,” said Shen Meng, director at Beijing-based Chanson & Co. “China’s mid- to high-end brands have ramped up production capacity but demand is weakening, and that gap is likely to reduce profit margins and pressure stock prices.”
–With assistance from Jeanny Yu, Zhu Lin, Mengchen Lu, Sangmi Cha, and Aya Wagatsuma.
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