Some investors are missing out on attractive consumer-related shares in China due to pessimism about the economic recovery, said Tiffany Hsiao, a portfolio manager with two decades of experience covering the nation’s assets.
As the economic rebound shows signs of stalling just months after reopening from Covid Zero restrictions, stocks linked to retail spending have underperformed. Sub-gauges tracking consumer discretionary and staples shares in the CSI 300 Index have both fallen over 10% from highs early in the year, about double the drop in the benchmark. For Hsiao, that presents buying opportunities.
“There’s a lot of really really cheap consumer stocks that are completely overlooked because people are very bearish on the Chinese consumer,” said Hsiao, who managed $180 million in assets at Artisan Partners Asset Management Inc. as of the end of March. “A lot of investors are missing the point that if you have income growth, consumption will always follow.”
Before joining Artisan Partners in 2020, Hsiao was lead portfolio manager at Matthews China Small Companies Fund for five years, during which it had annualized returns of 24%, beating 95% of peers, data compiled by Bloomberg show.
Her current Artisan China Post-Venture Strategy, which invests in Chinese companies across public and private equity markets, has lost 17% since its April 2021 inception as of the end of March. That’s in line with declines in the benchmark MSCI China SMID Cap Index, as economic damage from Covid lockdowns dragged down shares.
Recent official data suggest that China’s rebound is lopsided, with demand for goods slowing as consumers increase spending on services such as travel and restaurants.
Cultural differences suggest that there won’t be an immediate jump in discretionary spending like what was seen in the US after its economy reopened, said Hsiao. For Chinese people, “the first thing they do is they go back to the office and try to make more money,” adding that once they “feel like OK, their incomes are back to normal, they should start spending more like Americans again.”
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San Francisco-based Hsiao said that she looks at alternative data such as foot traffic and on-the-ground feedback from her research team in the biggest Chinese cities like Beijing, Shanghai and Shenzhen, and based on those, “the economy’s recovering just fine.”
China’s advertising platform stocks are a “more interesting way” to play the consumer trade than individual brand companies as the ad firms benefit from broad-based improvement, according to Hsiao. Shares connected to the travel segment are another area where she sees opportunity.
Big gainers in the ad sector include Shenzhen-listed advertisement service provider Focus Media Information Technology Co., which has jumped more than 10% from its lows in April, and Simei Media Co., which has surged over 40% from its bottom last month.
Hsiao sees the “most risks” in renewable energy and semiconductor shares. While the portfolio manager likes the long-term structural theme of China becoming more self reliant in key sectors amid heightened geopolitical tensions, she said the stocks have became an easy thematic play with very expensive valuations.
