CIO expects the recovery in Chinese consumption to gain further momentum from 2Q onwards, auguring well for Chinese reopening beneficiaries such as consumer, internet, medical equipment, and transportation stocks. (ddp)

The MSCI ACWI was flat on the first day of trading in March, and the S&P 500 fell 0.5%.

However, despite the uncertain US interest rate outlook, we expect certain parts of the market to benefit from early inflection points in various regions, including consumer-related sectors.

China’s reopening is set to drive a consumption-led recovery in the economy this year.

We estimate that Chinese households have accumulated excess savings of over CNY 4.6tr after three years of mobility restrictions, and we believe this will help drive consumption growth to rebound to 7% this year from near zero levels last year.

Indeed, high-frequency data shows that Chinese consumer spending is already getting off to a strong start shortly after the mobility curbs were dismantled in early 2023. Sales at the box office and on catering over the Chinese New Year holiday in late January reached 114% and 104% of 2019 levels, respectively. Passenger traffic, domestic tourism revenue, and international travel have all picked up as well. The government has also indicated that it will prioritize policies to boost consumption. President Xi Jinping said in January that domestic consumption will be key to economic recovery this year. Shortly after his remarks, the Ministry of Commerce announced that it plans to roll out policies to boost consumption, with automobiles and home appliances among the key focus areas.

We expect the recovery in Chinese consumption to gain further momentum from 2Q onwards, auguring well for Chinese reopening beneficiaries such as consumer, internet, medical equipment, and transportation stocks.

European consumer stocks to benefit from a recovery in European and Chinese spending.

European households faced a challenging backdrop over the last 18 months as excess savings, built up during the pandemic, were eroded by high inflation, rising interest rates, and surging gas prices.

Wage growth lagged the rise in household expenses, leading to sharp falls in real disposable income and consumer confidence. But from here, we expect the outlook to improve. With wage growth starting to pick up, inflation past the peak, and in time, less hawkish central banks, we expect disposable income to rise and consumer sentiment to rebound. While still at depressed levels, the EU consumer confidence indicator rose to –20.6 in February after hitting a record low of –29.8 in September 2022.

Given its sensitivity to falling inflation and interest rate expectations, consumer spending is typically one of the first areas to recover in a downturn. Similarly, the nature of consumer stocks’ performance is typically early cycle too. In addition, we expect China’s reopening to benefit European consumer stocks. European stocks have the second-highest exposure to China compared to other regions, with 8% of sales generated from the Chinese market. This is especially so for luxury brands, which should benefit from a return of Chinese tourists to Europe. Chinese consumers accounted for one-third of global luxury brand sales prior to the COVID outbreak, but only 17% last year.

We think that earlier inflection points in China and Europe should favor outperformance in emerging market (EM) equities, including China, and some early-cycle markets like European consumer stocks. We are most preferred on EM equities, including China where we like reopening beneficiaries that are set to benefit from the rebound in consumption. For European consumer exposure, we recommend 60% weight to consumer discretionary (of which 15% are in autos) and 40% to consumer staples relative to MSCI Europe. Using that weighting, the price-to-book valuation relative to MSCI Europe of the consumer sectors is currently 9% cheaper than its average since 2007 and as such, we believe it is well-positioned to benefit from an improving consumption outlook.

Main contributors - Mark Haefele, Patricia Lui, Vincent Heaney, Jon Gordon

Content is a product of the Chief Investment Office (CIO).

Original report - Chinese, European consumer stocks are among the bright spots in equities, 2 March 2023.