Investing in Those Elusive Chinese Consumers

China’s slowdown looks to have bottomed out, at least for now. Third-quarter GDP grew by 7.4% , the lowest rate in three years, but in line with what economists were expecting.

But most encouraging was the news that Chinese retail sales saw growth that was nearly double that figure at 14.4%.

I’m not the biggest fan of China’s “managed capitalism,” and, eventually, I believe that this model will reach the end of its road. In one critical aspect, it already has. China’s leaders have stated it is their goal to make China’s economy more “balanced,” meaning less dependent on exports and investment and more focused on domestic consumer spending.

But whether Beijing desires it or not, I believe this transformation would be happening anyway. As China’s middle classes expand and adopt acquisitive Western lifestyles, it is inevitable that their economic clout will be felt.

Ah, the elusive Chinese consumer. Just hearing him mentioned is enough to trigger a Pavlovian dog response in investors. But getting real access to him has proved to be difficult.

Consider that familiar consumer staple we know and love: beer. I have been a consistent advocate of global “Big Beer” as a play on rising consumer incomes. Heineken (HINKYis a favored long-term holding of my Covestor Sizemore Investment Letter portfolio , and I have also written favorably about Anheuser-Busch InBev ($BUD). Both of these megabrewers have excellent exposure to the growing — and beer swilling — emerging market middle class.

But what about Chinese brewer Tsingtao Brewery (TSGTF)? It is, after all, the best pure play on Chinese beer consumption. Unfortunately, it is also too expensive to be taken seriously. Investors wanting access to Chinese beer drinkers have bid the shares up to 25 times earnings and to a dividend yield of less than 1% (as of 10/22).

Chinese Web browser Baidu ($BIDU) is also a bit on the pricey side at 29 times earnings, a valuation I might have expected to see 12 years ago. China Mobile ($CHL) remains attractively priced and pays a respectable 3.5% in dividend yield (as of 10/22).

Otherwise, it is a real struggle to find Chinese stocks with decent liquidity that cater to the country’s domestic consumers.

Instead, I continue to be a fan of the indirect approach, finding American and European companies with high exposure to China. Luxury goods stocks have been a good fit, and most have sold off, or at least traded sideways, in recent months due to fears that China’s slowdown would hit sales.

With China looking to be turning a corner, luxury firms will likely have a nice finish to 2012. One that I particularly like is the British Burberry (BURBY) . Burberry lost a quarter of its value last month on fears that its sales in China were slowing worse than expected. Shares have recovered about half of those losses in the weeks that followed, but expectations for the company are mixed.

Should Chinese luxury spending recover even slightly — and I expect that it will do much better than that — I expect Burberry to enjoy a nice multi-month rally.

This article first appeared on MarketWatch.

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China’s GDP: A High-Quality Problem

China has what I like to call a “high quality problem.”

The Chinese economy grew by 7.4 percent in the third quarter.  This was the country’s worst quarter since early 2009, but it was in line with market expectations.

Only in China would 7.4% growth constitute a severe slowdown.  I don’t have to tell you that this is far above the growth rates of any other country of any real size.  China may not be growing like it used to, but it’s still the best show in town among major world markets.

Sentiment on China remains awful—just this past week, Coca-Cola (KO) joined the long list of Western firms blaming lackluster growth on the Chinese slowdown—but the data is mixed and showing signs of life.   Releases o n fixed asset investment, retail sales and industrial output all beat expectations.

All of this rotten sentiment has translated into some pretty horrendous stock returns for Chinese investors.  Chinese stocks have been in almost continuous decline for the past two years—at least up until last month.

I recommend investors take a look at the iShares FTSE China 25 Index ETF ($FXI).  I like what I see here.  Chinese stocks appear to be starting a new uptrend, even while sentiment towards them remains terrible.

If the Chinese economy maybe—just maybe—doesn’t end up being as sick as everyone seems to think it is and we see some signs of life in the next few months, sentiment can shift if a hurry.  And when it does, I expect FXI to enjoy a quick boost.

7.4% growth in a slow-growth world isn’t half bad, and eventually investors will reach the same conclusion.  In the meantime, we’re getting access to an index that trades at 8 times earnings and yields 2.7% in dividends.  Not too shabby indeed.

This article first appeared on TraderPlanet.  Sizemore Capital currently has no positions in any securities mentioned.

China is Slowing: How to Invest

It’s a peculiar sort of problem when your economy grows at 8.1% in the first quarter and yet talk abounds of a “hard

It’s a peculiar sort of problem when your economy grows at 8.1% in the first quarter and yet talk abounds of a “hard landing.”  American and Europeans haven’t seen that kind of growth in decades—and they could desperately use it today.  Yet such is life is China; after years of growing at a blistering pace, growth of “only” 8.1% represents a slowdown.

The 8% mark is considered by many to be the minimum growth rate that China needs to maintain high employment and to keep living standards rising.  And by the government’s own calculations, Chinese growth will likely slip below that level for the full year 2012.  Citing weakness in China’s European export markets and lower construction spending, the Chinese government lowered their full-year target to 7.5%.

The Chinese government doesn’t take its own GDP numbers seriously (they know the numbers are baked), and neither should we. But other statistics are even more sobering.

Consider the tepid growth in imports.  China’s imports grew by a pitiful 0.3% in April, compared to an average growth rate of 25% throughout 2011.  It is no shock that this has coincided with a general sell-off in commodities prices.  More on that shortly.

Let’s take a look at what China’s leaders themselves find important.  Li Keqiang, China’s heir apparent as premier, let on that he watches three indicators to gauge the direction of the Chinese economy (see his comments): electricity consumption, rail cargo, and bank lending.  None tells a particularly optimistic story.

Electricity consumption grew by just 0.7% last month vs. 7.2% the month before.  Growth in rail cargo volume has been cut in half.  And bank lending?  With the government actively trying to deflate a housing and construction bubble, it has slowed dramatically.

Now that I’ve bombarded you with scare statistics, how should we react as investors?

First, step back and try to keep perspective.  Yes, there is a steady stream of bad news coming out of China that signals slow growth ahead.   But “slow growth” is clearly a relative term when your economy is growing at a 7-8% clip.

China’s leadership are not fools, and they realize that the model that has served them so well in recent decades—manufacturing cheaply and exporting to the West—is broken.  It’s hard to find success as an export-driven economy when the buyers of your products are grappling with a crippling debt crisis.

Realizing this, China’s leadership indicated earlier this year that “the key to solving the problems of imbalanced, uncoordinated, unsustainable development [in China] is to accelerate the transformation of the pattern of economic development. This is both a long-term task and our most pressing task at present.”

In other words, it is the stated objective of the Chinese government to deemphasize investment and instead boost domestic consumption.

Investors wanting to profit from the reorientation of China can follow two trends:

  1. Avoid commodities and the firms that produce them or even look for opportunities to go short.  China has been the overwhelming force behind the commodities bull market of the past decade, and without aggressive Chinese buying there is no bull market.
  2. Buy the companies that stand to profit from a Chinese consumer shopping spree.  My preferred “fishing pond” is the luxury goods sector, defined here as everything from flashy handbags to performance automobiles.

Consider what the Economist has to say about China’s demand for luxury:

More than half of this year’s growth in luxury goods will come from China, where sales are set to soar by 24% in 2012. The country is already the largest market for jewellery after America, and for gold after India, and is gaining fast on both leaders. Prada and Gucci owe a third of their global sales to the rich in China. CTF saw same-store sales on the mainland shoot up by 45% from April to September last year.  See “Riding the Gilded Tiger

According to the Financial Times, emerging markets account for 40% of all luxury sales (up from 27% as recently as 2007), and this does not include wealthy emerging market tourists who buy in the shops of New York or London.  Again, according to the Financial Times, as much as half of the luxury sales in Europe are to emerging-market tourists, many of whom hail from China.

This week Richemont, owner of the Cartier brand (among many others) and the world’s second largest luxury retailer by sales, announced that sales and profits rose 29% and 43%, respectively, largely on strong demand from China.  Perhaps surprisingly, demand in Europe was robust, with sales up 20%.  Crisis or not, it would appear that well-heeled consumers are spending freely on life’s frivolities.

The crisis in Europe has make the luxury goods sector all the more interesting.  Most of the biggest names in high-end luxury goods are European firms, and with the Eurozone mired in crisis we’re getting buying opportunities we might not see again for a long time.

One of my favorites is French luxury conglomerate LVMH ($LVMUY), the maker of Louis Vuitton handbags, Dom Perignon champagne, and many other delightful goodies.  Mercedes-Benz manufacturer Daimler AG ($DDAIF) is also an excellent play on Chinese growth.  China is the biggest market for the Mercedes S-class and the biggest engine of the company’s growth.

Investors wanting to stay closer to home could consider Beam, Inc. ($BEAM), the distiller or Jim Beam Maker’s Mark bourbon whiskies and Skinnygirl cocktails among others.    Beam is a smaller rival to international spirits juggernaut Diageo ($DEO), and its brands lack some of Diageo’s cachet. Still, Beam is attractive as a recent spinoff from Fortune Brands, and it stands to grow at a significantly faster pace in the years ahead.  I consider both excellent holdings for the next 12-24 months.

Disclosures: LVMUY, DDAIF, DEO and BEAM are held by Sizemore Capital clients.

The Luxury Toilet and the Rise of the Affluent Chinese Consumer

In the interconnected web of the global economy, the rise of China has been one of the biggest drivers of the decade-long bull market in energy and commodities. But China is also making its presence felt in other less obvious areas of the economy. Yes, it would appear that affluent Chinese are driving a global boom in luxury bathrooms.

Kohler, the American plumbing fixtures manufacturer, now sells the $6,400 Numi luxury toilet (see photo). Driven by the demanding tastes of China’s newly wealthy, the Numi features a heated footrest and a “sleek iTouch style remote,” according to the Financial Times, that controls an internal music system, the adjustable bidet, and the temperature of the seat. It also allows the user to play video games, read e-books, and call friends on Skype. The press release didn’t elaborate on whether or not Skype’s video conferencing features are enabled; I sincerely hope that they are not.
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Genetics, the China-Tibet Dispute, and Investment Psychology

In “Human and Economic Evolution,”  I discussed how natural selection is alive and well among humans, and used such examples as genetic resistance to malaria among Africans and high aptitudes in the maths and sciences among Ashkenazi Jews.  Today I’d like to discuss an interesting finding reported in The Economist that is relevant to the China/Tibet dispute, and I’m going to tie it into a broader discussion of the human brain and investment psychology.

Tibetans and their supporters in Western countries have long contended that the Han Chinese do not belong in Tibet.  New genetic research suggests they may be correct–to an extent.
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