China consumer stock rout signals darkening economic outlook

Bloomberg

Covid restrictions are stifling spending in China’s vast consumer market and turning some popular retailers and automakers into stock laggards.
The outpouring of pent-up demand has been absent in Covid zero China. Instead, an uncertain growth outlook, coupled with record high youth jobless rate, has caused consumer discretionary stocks in the MSCI China Index to underperform the broader gauge this quarter. That’s a stark contrast to a double-digit gain for a global consumer index.
Investors have little hopes of a near-term revival in China’s consumption. On top of lockdowns in major cities, health officials have tightened travel restrictions ahead of a national holiday, reinforcing their commitment to Covid Zero as the crucial twice-a-decade party congress approaches.
“People are beginning to cut down on spending again — Covid is one thing, another thing is, overall, the economic backdrop itself is deteriorating,” said Crystal Chan, head of investment specialist of Principal Asset Management (Asia). “This is a big threat to the Chinese economy and that is why we are avoiding some of the consumer discretionary names in our Asian portfolio.”
The MSCI China’s sub-index on consumer discretionary stocks has fallen more than 14% this quarter, trailing the benchmark’s 12.6% loss. Among the worst performers are Pop Mart International Group Ltd — a high-end toy retailer — falling more than 50%, and luxury car dealer Zhongsheng Group Holdings Ltd, down more than a third.
China has seen retail sales contract from a year earlier through July, in contrast to growth rates of about 8% or more before the pandemic. Consumer confidence remains far below the 100-threshold, indicating dominant pessimism.
While the nation’s consumer market — the world’s largest — remains too important for investors to shun, a broader policy push towards promoting equality and discouraging extravagant wealth is another factor that’s complicating investment decisions.