After a relatively benign earnings season, the one area of notable weakness we have seen is in multinational consumer-focused companies exposed to China. Whether in premium coffee drinks, electric vehicles, high end technology devices or luxury fashion and cosmetics, sales results in China were nearly uniformly worse than overall numbers for a variety of global companies. With Chinese equities starting to rebound, is there any reason to think the consumer there will follow? We are not optimistic.
The problems facing the Chinese consumer are far more serious and intractable. The main issue is that the reckoning in the housing market is still mostly incomplete, given that there are administrative controls on new home prices. Because the market has been unable to find a bottom, pessimism about many households' most important asset is likely to be sustained. Moreover, fewer Chinese households own equities than in places like the U.S., so any stock rally will not enhance their propensity to spend.
Additionally, many types of discretionary spending are not as entrenched as in the U.S., so an infusion of American-style stimulus checks is unlikely to provide the same economic boost as we would expect in the West. We see little scope for an entrepreneur-led market recovery either, as the lack of a western-style bankruptcy regime means that many who fell into debt due to pandemic lockdowns have been unable to recover properly even if they were willing to start again. Instead, we see some potential upside in industrial or export manufacturing in China as the strong greenback makes exporters more competitive. Additionally, it is possible that these companies benefit from a future return to China's standard playbook of stimulating the industrial sectors to restore economic prosperity.
Sources: Bloomberg, J.P. Morgan, New York Times, 2024.