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

As Beijing prioritizes artificial intelligence, China's consumer sector is languishing in a lost decade. MSCI China's consumer goods sub-indexes plunged nearly 18% over the past six months, hitting near-10-year lows, while AI-heavy technology stocks soared more than double their 2016 levels. Consumer staples firms in the MSCI gauge missed profit expectations by nearly 50% in the latest earnings season.

Retail sales grew by just 0.4% in August, indicating weak domestic demand, and there are no signs of investor pessimism easing after the Golden Week holiday, a critical period for travel and spending. Chen Shi, a fund manager, noted that summer data disproves any consumer spending recovery and highlights a crowding-out effect, with investors increasingly focused on AI beneficiaries.

This shift marks a stark contrast to the pre-pandemic optimism surrounding China's middle class, which has all but disappeared due to a prolonged property slump, sluggish income growth, and a crisis of consumer confidence. Despite policy support aimed at reviving housing sales, property prices continue to slide. Some analysts suggest that measures to stabilize asset prices, boost wage growth, and raise the minimum income could gradually rebuild consumer confidence.

In contrast, industrial and tech companies have delivered upside surprises, while consumer stocks trade at depressed valuations and light positioning may rekindle interest if market volatility returns.