(Bloomberg) — China’s once-powerful buyers have turned into reluctant lenders in the face of an economic slowdown, a shift that’s proving particularly painful for stocks tied to premium brands.
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High-end beverage maker Kweichow Moutai Co., luxury car dealer Zhongsheng Group Holdings Ltd. and Nike distributor Topsports International Holdings Ltd. are all down about 10% or more this year, wiping out gains in stock benchmarks. Analysts attribute the underperformance to the downward trend in Chinese consumption, as evidenced by subdued spending during the Dragon Boat Festival and the first signs of weakness during the ongoing 618 shopping event.
Consumption has remained tepid despite Beijing’s efforts to boost spending, including trade-ins on appliances and cars and easing car lending rules. While companies offering affordable products have outperformed their luxury peers in the market, doubts about the strength of China’s economic recovery are giving investors cold feet about consumer stocks in general.
“This downward trend for premium names has not yet bottomed out,” said Xiang Xiaotian, director at Shanghai Chengzhou Investment Management Co. “We will only see some improvement if the economy and real estate market start to stabilize in 2025.”
Chinese premium brands are struggling to come up with a viable strategy as consumers slow down. The demand for better value for money is in stark contrast to a few years ago, when the country’s fast-growing middle class held out hope for a consumption upgrade that would boost sales of luxury goods.
Shares of Kweichow Moutai, whose flagship baijiu drinks typically sell above 2,500 yuan ($344.58) per bottle, are down 9.9% in 2024, compared with a 3.2% rise in the CSI 300 Index of shares on the mainland. Budweiser Brewing Co APAC, which markets premium beers in China, is among the worst performers on this year’s Hang Seng Index, along with Zhongsheng Group. Both stocks lost about a third of their value.
It’s not just local businesses that are suffering. Some foreign luxury labels have had to offer steep discounts in China due to a slump in spending.
Analysts at Jefferies Financial Group Inc. found slowing sales for apparel and appliances in May, despite retailers rolling out 618 promotions. The brokerage pointed to caution at Nike distributors Topsports and Pou Sheng International Holdings Ltd. in China, as the brand’s pricing strategy may be “too expensive” for consumers.
Traders are hoping for stronger measures to revive consumption at the Third Plenum in July, one of the country’s most important political events, where top leaders will map out longer-term economic plans and identify potential policy turning points. Data next week could reinforce this need, with a Bloomberg survey pointing to a modest 3% growth in retail sales in May.
The biggest catalyst for spending “would be a continued easing of real estate measures and efforts to boost consumption,” said David Chao, strategist at Invesco Asset Management in Singapore. More could come from the plenum to boost sentiment, which could then lead to an improvement in retail spending, he said.
While expensive brands have borne the brunt of the recent selling, consumer stocks in general have lagged the market recovery. An MSCI China sub-measure of consumer staples has fallen almost 12% this year, compared with a rise of more than 6% in the benchmark.
Strategists at UBS Group AG this month shifted their preference from domestic consumer stocks to semi-equipment and real estate, citing factors such as tepid income growth and high energy costs.
Wild swings at PDD Holdings Inc., whose stock was one of the hottest bets in 2023 as its low-price strategy riled fans, show how an intensifying price war is worrying investors. US-listed stocks have wobbled after rising 79% in 2023. Shares of Guangzhou-based Miniso Group Holding Ltd., a budget retailer, are little changed in Hong Kong this year despite its overseas expansion plans.
“There is generally a wait-and-see sentiment as uncertainties surrounding the economic situation are significant,” said Shen Meng, director of Beijing-based Chanson & Co. “Mid- to high-end brands in China have only increased production capacity to We see weakening demand, and that gap is likely to hurt margins and put pressure on stock prices.”
–With help from Jeanny Yu, Zhu Lin, Mengchen Lu, Sangmi Cha and Aya Wagatsuma.
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