Investors are piling into China’s consumer sector amid speculation company earnings will be sheltered from the economic fallout of the trade war with the U.S.
A gauge of consumer staples has rallied 13% in the past three months, the only gainer among 10 industry groups on the CSI 300 Index, which has lost almost 5%. Technology shares have fared worst, losing 20%.
There’s little doubt the economy is under pressure. Industrial output growth slowed to the weakest pace since 2002 in May and investment decelerated, data last week showed. Retail sales were a bright spot, expanding 8.6% compared with a year earlier. The expectation is that such resilience in consumer spending will last, but risks of a sell-off in staples is growing as the shares grow increasingly pricey.
“Investors are huddling together for warmth in consumer staples, expecting them to deliver growth unaffected by external changes,” said Fu Gang, fund manager at River East Asset Management Advisory Ltd.
China’s consumer staples have outperformed other sectors in the last three months
It’s a turnaround from last year, when it appeared that the trade war had contributed to a deterioration in sentiment that left consumption stocks doing even worse than the broader market as investors sold off Chinese equities.
Liquor makers in particular are outperforming. Wuliangye Yibin Co. and Luzhou Laojiao Co. have jumped more than 18% in the past three months.
The companies are a sure bet for now, say Lin Qi, fund manager at Lingze Capital. “The Moutai drinkers are too rich to be affected, while the second-rate distillers will always benefit from the scarcity of Moutai.”
Baijiu stocks have some way to go before they peak, according to Bright Smart Securities analyst Mark Huang, but the benefits of buying the shares are “quickly dissolving” as their valuations veer toward 30 times projected earnings. Wuliangye and Luzhou trade at more than 20 times 12-months estimated profits.
“If the trade talks deteriorate further, the trade may unravel if large institutions sell,” Huang said. “If trade tensions ease, recovering risk appetite may also lead investors to dump protective plays.”
Other top performers include Foshan Haitian Flavouring & Food Co., which makes food seasonings and trades at almost 50 times estimated earnings, and supermarket operator Yonghui Superstores Co., valued at over 30 times. The CSI 300 Index trades at a multiple of 11 times.
The top performer is New Hope Liuhe Co., an animal feed maker that’s surged about 50% in the past three months on speculation a deadly swine disease will boost demand for its concentrated feed. Enthusiasm for other pig-related stocks is fading. Wens Foodstuffs Group Co. has dropped 6% in the period, paring its 2019 gain to 47%.
“Further upward gains can be maintained only through improving earnings,” said China Post Securities Co. analyst Yang Hao.