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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About The Author: Scott Phillips
Scott Phillips is a principal and portfolio manager at Templeton and Phillips Capital Management, LLC. Prior to working with Templeton and Phillips Capital Management, LLC, Scott Phillips founded Cumberland Capital Corp, located in Chattanooga, TN. Founded in June 2004, Cumberland Capital provided equity research services to Green Cay Asset Management, a hedge fund management company located in Nassau, Bahamas. In this capacity with Cumberland Capital, Scott was the lead research analyst on the Siebels Hard Asset Fund a long/short equity fund managed by Green Cay Asset Management. In addition to consulting on this fund Scott also provided equity recommendations for the Green Cay Emerging Markets Fund. Prior to consulting Green Cay’s funds Scott was employed as a research analyst with Green Cay beginning in January of 2004. Before joining Green Cay, Scott was an equity research associate analyst with SunTrust Robinson Humphrey (including its predecessor companies) in Atlanta GA from January of 1999 to December of 2003. Scott co-authored with Lauren Templeton of the book “Investing the Templeton Way” released in 2008 by McGraw Hill. Scott is also the author of “Buying at the Point of Maximum Pessimism” a book on forward looking investment themes published by the FT Press in 2010. In addition to these books, Scott co-authored a revision of William Proctor’s 1983 biography of Sir John Templeton titled “The Templeton Touch” released in December 2012. Scott is a member of the John Templeton Foundation where he serves on the Finance Committee and Scott serves as chairman for the board trustees of the Templeton Foundation Inc, and as a member of the Audit Committee. Scott received his B.A. The University of the South.
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