This article is authored by MOI Global instructor Scott Phillips, Portfolio Manager at Templeton & Phillips Capital Management, based in Chattanooga, Tennessee.
In the midst of the market’s anxiety surrounding Fed policy and trade disputes, we have become impressed by the relative bargains available surrounding the Chinese consumer. In our view, the Chinese consumer remains one of the more compelling investment opportunities over at least the next ten years (if not longer).
Regardless of the correction in global share prices, consumer behavior in both the U.S. and China shows little evidence of the pessimism that is dominating investor psyche. On this matter some simple data helps illustrate that the dispute has not advanced to the point that it is materially damaging China’s exports to the U.S., and for that matter, draws into question the extent to which that outcome is probable. To begin, China’s net exports only account for 2% of its GDP.
Additionally, only 19% of China’s exports are destined for the U.S. In other words, a more dispassionate view of these numbers suggests to us that the Chinese economy may eventually be affected by the threatened 25% tariffs, but perhaps not to the extent that some investors fear.
In the meantime, the Chinese consumer has demonstrated some slowing effect from earlier 2018 related to the government’s self-imposed deleveraging efforts (including shadow banking). However, the Chinese consumer is still producing retail sales growth in the 8% range, or approximately twice its U.S. counterpart. For evidence, October U.S. retail sales increased 4.6% year-over-year followed by 4.2% in November, and Chinese retail sales rose 8.6% and 8.1% in the same months, respectively. Despite any policy effects, secular growth trends related to the consumer appear to remain intact.
For instance, Alibaba’s “Singles Day” (i.e., similar to Cyber Monday) set a new record for Gross Merchandise Volume at $31 billion, representing 27% growth from last year. Despite the relatively solid results, shares among leading consumer enterprises tapping into secular growth have come under pressure alongside the broader markets. Importantly, this has led to valuation discounts that are attractive by historical measures, as well as versus global peers, whom we believe often carry considerably less growth potential and more financial leverage.
In the table below, we illustrate the data among a selection of leading Chinese consumer firms spanning a number of industries including technology, e-commerce, restaurant franchises, express delivery, online travel booking, and packaged food.
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