Date
15 October 2018
Given China's efforts to boost consumption, retail theme will remain a strong play in the stock market. Photo: china.org.cn
Given China's efforts to boost consumption, retail theme will remain a strong play in the stock market. Photo: china.org.cn

Chinese equities: Consumption plays likely to gain traction

As China seeks to transform its economy by reducing the reliance on investments and focusing more on boosting consumer spending, the consumption sector is likely to remain on a robust growth path.

Last year, the contribution to GDP from domestic consumption hit a multi-year high.

According to statistics, those born in the 60s and 70s are now the highest spending group. In coming years, they are expected to spend more on services such as healthcare and entertainment.

Youngsters, though restrained by their typically lower income level, are more receptive to spending on credit, as evidenced by the rising leverage. So they too will contribute to consumption growth.

I believe Chinese equities this year will be largely driven by corporate earnings rather than flimsy concepts. Investors are likely to prefer companies with solid earnings, growth prospects and reasonable valuation.

Last year, the consumer sector led the market gains. Food & beverage, bio-healthcare, culture and entertainment, and other retail plays all outperformed.

Given the emphasis on consumption amid China’s economic transformation, as well as the consumption upgrade trend, the earnings outlook of the sector remains promising, which should be supportive for stock prices of related companies.

The Chinese currency has been strengthening against the US dollar recently. If that leads to weaker export performance, Beijing might roll out a string of pro-consumption measures, which will bring additional strength to consumption plays.

This article appeared in the Hong Kong Economic Journal on Feb 26

Translation by Julie Zhu

[Chinese version 中文版]

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RC

Senior investment banker

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