Gifting is an important concept in China, especially within the
political sphere. Some of the country's largest
retailers are expecting a boost to sales
as the government goes through a once-in-a-decade transition of
leadership this month. Pent-up demand and the hope to curry favor
with new administration officials is expected to increase sales in
the fourth quarter and by 10% next year.
[caption id="attachment_72050" align="alignright" width="220"
caption="Mall in Shanghai, China"]
[/caption]
While overall economic growth has slowed in the past year, to
just 7.4% last quarter, data on retail sales and industrial
production have picked up. Since the country only changes party
leaders once every ten years, it will be vital to the incoming
administration to secure public favor by appearing responsive to
the economy. Beyond a streamlined approval process for new projects
and some increased infrastructure spending, the government has been
fairly quite over the last few months relative to the pace of
reserve ratio and interest rate cuts in the beginning of the year.
This could be in deference to the incoming government, allowing
them to make bigger cuts when the changeover occurs.
While ADR shares of Chinese retailers is limited, there may also
be an opportunity in U.S. companies with a strong presence in the
country. Consultancy firm KPMG is out with a 36-page
report on luxury brands in China that details the
sector
and some of the strongest brands. Coach (
COH
,
quote
) has been aggressive in the market and is trading at just 15.5
times trailing earnings, a discount to the five-year average price
multiple around 18 times.
While shares of the iShares FTSE China 25 (
FXI
,
quote
) have rebounded 23% off the 52-week low of $32.21 last October,
they are still well off recent highs and trade for just 8 times
trailing earnings of the stocks held in the fund. The fund may be a
good play on overall growth but does not hold a significant
exposure to the Chinese consumer, only in the 16.8% allocation to
telecommunications.
The government has made it an explicit goal to favor consumption
in the economy and transition from an export model. The Global X
China Consumer (
CHIQ
,
quote
) invests at least 80% of its assets in consumer companies that are
either domiciled in, or whose revenues are primarily from
China. Of the 43 holdings, only four are available as ADR
issues, so the fund provides a good opportunity into domestic
shares not otherwise available to most retail investors.
