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(Bloomberg) — A seemingly inexorable decline in the prices of Chinese goods amid weak consumer demand is dampening hopes that corporate profits can revive a sluggish stock market.
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From electric cars to fast food, companies are waging a promotional war aimed at attracting customers spooked by the bleak job outlook and whose wealth creation is hurt by the prolonged real estate recession. Consumer prices fell for the third consecutive month in December, the longest since 2009, deepening concerns about corporate profits and stock prices.
“All of this represents a very weak consumer environment, including a lack of consumer confidence and slowing income growth,” said Xin Yao Ng, Asia equity investment director at Abdon. “We are cautious about fourth-quarter earnings in most sectors and assume that will remain the case in the first quarter unless the government initiates large-scale measures to support the economy. There is.”
Since the end of September, consumer stocks have been the worst performer in the MSCI China index after real estate stocks. The market capitalization of companies included in the two consumer indexes has fallen by about $157 billion since then. The biggest drags on the MSCI benchmark over this period have been e-commerce giant Alibaba Group Holding, restaurant operator Yum China Holdings, and EV maker BYD, all of which have significantly We are offering discounts.
The world’s second-largest stock market has started 2024 on a dire note, with the MSCI China Gauge already down more than 4% so far this year. In 2023, the third consecutive year of decline will come to a halt.
Daisy Lee, fund manager at EFG Asset Management Hong Kong, said: “The big picture is that weak demand is leading to a deflationary environment, especially for companies that cannot achieve higher trading volumes at lower prices. It’s a bad omen.”
Read: Chinese price war erupts among consumer brands as growth slows
wide range of discounts
The EV industry has been hit hardest by fierce competition as growth slows, with Chinese manufacturers following Tesla’s lead in cutting prices to boost sales. BYD and its local peers, including Xpeng Inc. and Li Auto Inc., have shed billions of dollars in market capitalization in the past few months.
“Retail prices are falling rapidly,” Morgan Stanley analysts said in a 2024 outlook report on China’s EV sector. “Local brands have generally fared better than luxury and foreign brands in terms of discount expansion, but we expect further discount expansion into Q1 2024 due to seasonal influences.”
Read: Tesla rejects China price cuts and German factory closures
Even China’s vaunted internet giants have been affected, with Alibaba and JD.com Inc. seeing their stock prices fall amid a fierce battle for market share. The price war has made U.S.-listed PDD Holdings, the operator of discount website Temu, one of the few bright spots in China’s e-commerce industry.
Many business and market participants are hoping for interest rate cuts and government spending to prevent the economy from falling into a deflationary spiral.
Fund managers say their next trigger is pricing and sales data around February’s Lunar New Year, which could provide further clues about consumer confidence. The coming weeks could also be key for policy action, given that Chinese leaders will soon gear up for the National People’s Congress. The government is expected to announce formal growth targets for 2024 at the annual parliament in March.
Read: China expected to cut interest rates and increase cash to support economy
“No player is immune”
A survey conducted by Morgan Stanley late last month suggested that consumer sentiment was improving seasonally ahead of the holiday season. But “sustainability is questionable as the economic recovery slows,” analysts including Lillian Lu wrote in a note.
The researchers said pay cuts and job losses remain the top concerns for households, adding that the number of consumers expecting the economy to worsen has increased by two percentage points since November to 13%. .
Overall, there is little hope for a quick resolution. Citigroup expects consensus estimates for Li Ning and Anta Sports Products to decline around the next earnings season due to a hit from overseas competition and expansion into lower-tier cities with cheaper products.
Fast food companies are still embroiled in a long war for customers, with some offering full menus for as little as $3. It’s difficult to make a profit at such low prices.
“We expect industry margins to decline until the irrational price war ends,” JPMorgan Chase analyst Kevin Yin wrote in a note when lowering his forecast for Yum China. He added that “no player is immune” to the headwinds caused by slowing domestic demand growth.
Read: China’s deflation means domestic demand will be a big challenge in 2024
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