Moderate post-Covid economic activity in China could bring more stimulus support there — a move that would be a boost for Estee Lauder ( EL ), Starbucks ( SBUX ) and Wynn Resorts ( WYNN ). These are companies in our club portfolio with significant exposure to the world’s second largest economy. Mixed news Concerns about China’s economy have already prompted China’s central bank to cut its key interest rate. Tuesday’s rate cut, the first such move since August, came after China’s state banks cut depositor rates last week. China’s economy is struggling to reach its full growth potential after Beijing abandoned its zero-Covid policy. The recovery in China has been much slower than that experienced by other major countries when they lifted their pandemic restrictions. It manifests itself in many important Chinese industries. Real estate activity – which is estimated to account for nearly 30% of China’s gross domestic product (GDP) – has seen slower home sales, unfinished projects by developers and homebuyers defaulting on mortgage payments. New home sales in China for the week ended May 28 rose 11.8% from a year earlier, a sharp slowdown from 24.8% growth a week earlier, according to a report by Nomura’s chief China economist Ting Lu. In addition, new home prices in China fell 0.01% month-on-month in May after rising 0.2% in April, according to data from the China Index Academy survey. China’s labor market is also struggling. Official Chinese data showed urban unemployment among 16- to 24-year-olds rose to a record 20.4% in April, about four times the country’s broader unemployment rate. Still, the Chinese consumer has proven resilient to these broader economic challenges. China’s April retail sales of consumer goods rose 18.4% year-on-year, a sharp increase from March’s 10.6% rise, according to the China Bureau of Statistics. At the start of the year, China’s economy posted strong growth in the first quarter – a better-than-expected 4.5%, according to China’s National Bureau of Statistics. It recorded the fastest growth rate since the first quarter of 2022, helped by higher spending by Chinese consumers. Club Stock Results Recent financial results from our China-exposed companies show that Chinese consumers have kept pace, even as the broader economic recovery has lagged. Gaming company Wynn Resorts reported a strong first quarter in early May, driven by a recovery in Asia’s gambling hub Macau, giving us confidence that strong consumer spending on travel and experiences will continue in the coming quarters. We also added to the WYNN position earlier this month after the new wave of Covid hit China and dragged stocks down. But we saw the pullback as a buying opportunity and upgraded the stock to a 1 rating. Coffee giant Starbucks last month posted a strong fiscal second quarter, driven by positive growth in China, for the first time in nearly two years. But shares have fallen 15% since the start of May on fears that the recovery there is stalling. At the end of May, we bought shares of SBUX down. Prestige cosmetics brand Estee Lauder reported a more mixed fiscal third quarter in early May, pressured by a slower recovery in the company’s overstocked travel retail sales in Asia. This led to terrible management and a big selloff in EL stock. At the time, we thought the decline in stock was overblown, but realized it would take several quarters to clear the excess inventory. Later, in mid-May, we bought a small one into that weakness. All in all, Beijing is taking consistent and steady measures to support economic activity to accelerate its economic growth. We take this as a positive sign for consumer spending there. At the same time, we recognize that the continued recovery in certain areas of the Chinese economy also means uncertainty in the mix, which could mean pressure for some Chinese consumers, particularly those from lower-income households. However, based on recent retail sales data coming out of China, there is clearly pent-up consumer demand, which signals to investors like us that there is more growth ahead for companies that do business there. With signs of potential Chinese government stimulus on the horizon combined with a resilient consumer, we believe it is prudent to stick with Estee Lauder, Starbucks and Wynn Resorts as a way to play China’s post-Covid reopening, which has yet to fully materialize. . China is a growth market for any company and improving economic activity should be a catalyst for these stocks. (Jim Cramer’s Charitable Trust is long EL, WYNN, SBUX. Here’s a full list of stocks.) 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A customer holds a 100 yuan banknote at a market in Beijing.
Jason Lee | Reuters
Moderate post-Covid economic activity in China could bring more stimulus support there – a move that would be a boost for it Estee Lauder (EL), Starbucks (SBUX) a Wynn Resorts (WYNN). These are companies in our club portfolio with significant exposure to the world’s second largest economy.