China’s consumer stocks trapped in a lost decade as AI boom dominates

FILE PHOTO: China’s consumer stocks have fallen to near 10-year lows as weak domestic demand, sluggish incomes and the property slump contrast with surging AI-focused technology stocks. | Photo Credit: Dado Ruvic

Under the shadow of Beijing’s single-minded focus on artificial intelligence, China’s consumer stocks are trapped in a lost decade.

The industry is showing a stark contrast with the high-flying tech sector. MSCI China’s consumer goods sub-indexes plunged roughly 18% over the past six months to near 10-year lows, while the AI-heavy technology gauge surged to more than double its 2016 level. During the latest earnings season, consumer staples firms in the MSCI gauge missed profit expectations by nearly 50%.

The malaise reflects China’s lopsided economy, where Beijing’s drive for tech supremacy has fueled an export boom and funneled capital into AI firms with limited spillover to domestic demand. August retail sales crept up just 0.4%, and there are few signs that investor pessimism toward the sector will ease after the Golden Week holiday — a crucial period for travel and spending.

“Data this summer has disproved that there is any recovery in spending, and affirms that it still is a one-way bet on exports,” said Chen Shi, fund manager at Shanghai Jade Stone Investment Management Co. “From a market perspective, that has created a crowding-out effect. Investors have become increasingly concentrated in AI beneficiaries, while sectors such as consumption have been sold indiscriminately.”

The sour mood marks a dramatic reversal from the pre-pandemic years, when the rise of China’s middle class was celebrated as one of the world’s most compelling growth stories.

That optimism has all but evaporated as a protracted property slump, sluggish income growth and a crisis of consumer confidence have made the sector a losing bet. A drip feed of policy support over the years to revive housing sales — a key pillar for spending — has fallen short. The latest data showed property prices extending their slide.

Authorities could rebuild consumer confidence through measures from stabilizing asset prices to creating stronger wage growth prospects and raising minimum income, Chen said, adding that any meaningful improvement will likely be be gradual.

Weak consumer demand emerged as a recurring theme during the latest earnings season. Shede Spirits Co. described the sector as being in a “deep adjustment,” while department store operator Nanjing Central Emporium flagged softer visitor traffic and lower spending. Top liquor maker Kweichow Moutai Co.’s first-half net profit dropped.

Earnings for consumer staples firms in the MSCI China gauge fell 47% short of expectations in the latest season, while those producing discretionary goods missed by nearly 10%, data compiled by Bloomberg show. In contrast, industrial and tech companies delivered upside surprises.

The sector’s woes are unfolding against a global backdrop in which investors have shunned consumer shares for beneficiaries of the AI investment boom, according to Winnie Wu, head of Asia Pacific equity strategy at Bank of America. For China, domestic policy headwinds including tighter tax rule enforcements also create a heavier financial burden for both households and businesses, she said.

The bifurcated market has prompted some high-profile, actively managed Chinese funds with heavy exposure to consumer names to pivot to AI stocks. The same trend is playing out among exchange-traded funds, where inflows into tech funds have increasingly eclipsed those targeting consumer products, according to data compiled by Bloomberg.