China consumer stocks near decade lows as investors pile into AI

Recent data reveals Chinese consumer stocks nearing a decade low as investors shift their funds towards artificial intelligence companies, according to Bloomberg. The MSCI China's consumer goods sub-indexes have declined by around 18% over the last six months, nearing their lowest point in nearly a decade. Conversely, the technology index, heavily invested in AI businesses, has surged beyond double its 2016 value.

The economic disparity between China's consumption and technology sectors is evident. Beijing's focus on advanced technology has stimulated exports and directed investments towards AI, yet its effects on household demand have been minimal. Retail sales growth of just 0.4% in August further highlights the issue. Persistent property market decline, low income growth, and dwindling consumer confidence have all dampened spending.

Corporate earnings closely mirror these economic pressures. Consumer staples companies in the MSCI China index missed profit projections by 47% during the most recent earnings season, as per Bloomberg data, while consumer discretionary entities underperformed by nearly 10%. Industrial and technology companies, however, outperformed expectations in earnings.

In response to these trends, investors have redirected their capital towards AI-related companies. Some actively managed Chinese funds that were once dominated by consumer stocks have expanded their technology exposure, and inflows into technology exchange-traded funds have outpaced those targeting consumer companies. Consumer stocks have become relatively cheaper after the mass sell-off.

MSCI China’s consumer discretionary index now trades at approximately 11 times forward earnings, with consumer staples sitting at about 13 times. In comparison, the information technology index trades at roughly 21 times.

The lower valuations and reduced investment positioning could potentially draw in buyers during periods of technology-sector turbulence. Such a shift already occurred temporarily during the global technology sell-off in July. However, a lasting recovery would necessitate an improvement in domestic consumption. Recent government efforts to support housing have yet to reverse falling property prices, keeping household confidence and spending under strain.