{"id":29758,"date":"2012-05-21T08:00:35","date_gmt":"2012-05-21T12:00:35","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/05\/china-is-slowing-how-to-invest\/"},"modified":"2012-05-21T08:00:35","modified_gmt":"2012-05-21T12:00:35","slug":"china-is-slowing-how-to-invest","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/05\/21\/china-is-slowing-how-to-invest\/","title":{"rendered":"China is Slowing: How to Invest"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a>It\u2019s a peculiar sort of problem when your economy grows at 8.1% in the first quarter and yet talk abounds of a \u201chard landing.\u201d\u00a0 American and Europeans haven\u2019t seen that kind of growth in decades\u2014and they could desperately use it today.\u00a0 Yet such is life is China; after years of growing at a blistering pace, growth of \u201conly\u201d 8.1% represents a slowdown.<\/p>\n

The 8% mark is considered by many to be the minimum growth rate that China needs to maintain high employment and to keep living standards rising.\u00a0 And by the government\u2019s own calculations, Chinese growth will likely slip below that level for the full year 2012.\u00a0 Citing weakness in China\u2019s European export markets and lower construction spending, the Chinese government lowered their full-year target to 7.5%.<\/p>\n

The Chinese government doesn\u2019t take its own GDP numbers seriously (they know the numbers are baked), and neither should we. But other statistics are even more sobering.<\/p>\n

Consider the tepid growth in imports.\u00a0 China\u2019s imports grew by a pitiful 0.3% in April, compared to an average growth rate of 25% throughout 2011.\u00a0 It is no shock that this has coincided with a general sell-off in commodities prices.\u00a0 More on that shortly.<\/p>\n

Let\u2019s take a look at what China\u2019s leaders themselves find important.\u00a0 Li Keqiang, China\u2019s heir apparent as premier, let on that he watches three indicators to gauge the direction of the Chinese economy (see his comments<\/a>): electricity consumption, rail cargo, and bank lending.\u00a0 None tells a particularly optimistic story.<\/p>\n

Electricity consumption grew by just 0.7% last month vs. 7.2% the month before.\u00a0 Growth in rail cargo volume has been cut in half.\u00a0 And bank lending?\u00a0 With the government actively trying to deflate a housing and construction bubble, it has slowed dramatically.<\/p>\n

Now that I\u2019ve bombarded you with scare statistics, how should we react as investors?<\/p>\n

First, step back and try to keep perspective.\u00a0 Yes, there is a steady stream of bad news coming out of China that signals slow growth ahead.\u00a0\u00a0 But \u201cslow growth\u201d is clearly a relative term when your economy is growing at a 7-8% clip.<\/p>\n

China\u2019s leadership are not fools, and they realize that the model that has served them so well in recent decades\u2014manufacturing cheaply and exporting to the West\u2014is broken.\u00a0 It\u2019s hard to find success as an export-driven economy when the buyers of your products are grappling with a crippling debt crisis.<\/p>\n

Realizing this, China\u2019s leadership indicated earlier this year that \u201cthe key to solving the problems of imbalanced, uncoordinated, unsustainable development [in China] is to accelerate the transformation of the pattern of economic development. This is both a long-term task and our most pressing task at present.\u201d<\/p>\n

In other words, it is the stated objective of the Chinese government to deemphasize investment and instead boost domestic consumption.<\/p>\n

Investors wanting to profit from the reorientation of China can follow two trends:<\/p>\n

    \n
  1. Avoid commodities and the firms that produce them or even look for opportunities to go short.\u00a0 China has been the overwhelming force behind the commodities bull market of the past decade, and without aggressive Chinese buying there is no bull market.<\/em><\/strong><\/li>\n
  2. Buy the companies that stand to profit from a Chinese consumer shopping spree.\u00a0 My preferred \u201cfishing pond\u201d is the luxury goods sector, defined here as everything from flashy handbags to performance automobiles.<\/li>\n<\/ol>\n

    Consider what the Economist has to say about China\u2019s demand for luxury:<\/p>\n

    More than half of this year\u2019s growth in luxury goods will come from China, where sales are set to soar by 24% in 2012. The country is already the largest market for jewellery after America, and for gold after India, and is gaining fast on both leaders. Prada and Gucci owe a third of their global sales to the rich in China. CTF saw same-store sales on the mainland shoot up by 45% from April to September last year.<\/em>\u00a0 See \u201cRiding the Gilded Tiger<\/a>\u201d<\/p>\n

    According to the Financial Times<\/a>, emerging markets account for 40% of all luxury sales (up from 27% as recently as 2007), and this does not include wealthy emerging market tourists who buy in the shops of New York or London.\u00a0 Again, according to the Financial Times, as much as half of the luxury sales in Europe are to emerging-market tourists, many of whom hail from China.<\/p>\n

    This week Richemont, owner of the Cartier brand (among many others) and the world\u2019s second largest luxury retailer by sales, announced that sales and profits rose 29% and 43%, respectively, largely on strong demand from China.\u00a0 Perhaps surprisingly, demand in Europe was robust, with sales up 20%.\u00a0 Crisis or not, it would appear that well-heeled consumers are spending freely on life\u2019s frivolities.<\/p>\n

    The crisis in Europe has make the luxury goods sector all the more interesting.\u00a0 Most of the biggest names in high-end luxury goods are European firms, and with the Eurozone mired in crisis we\u2019re getting buying opportunities we might not see again for a long time.<\/p>\n

    One of my favorites is French luxury conglomerate LVMH ($<\/span>LVMUY<\/a>),<\/strong> the maker of Louis Vuitton handbags, Dom Perignon champagne, and many other delightful goodies.\u00a0 Mercedes-Benz manufacturer Daimler AG ($<\/span>DDAIF<\/a>)<\/strong> is also an excellent play on Chinese growth.\u00a0 China is the biggest market for the Mercedes S-class and the biggest engine of the company\u2019s growth.<\/p>\n

    Investors wanting to stay closer to home could consider Beam, Inc. ($<\/span>BEAM<\/a>),<\/strong> the distiller or Jim Beam Maker\u2019s Mark bourbon whiskies and Skinnygirl cocktails among others.\u00a0 \u00a0\u00a0Beam is a smaller rival to international spirits juggernaut Diageo ($<\/span>DEO<\/a>),<\/strong> and its brands lack some of Diageo\u2019s cachet. Still, Beam is attractive as a recent spinoff from Fortune Brands, and it stands to grow at a significantly faster pace in the years ahead.\u00a0 I consider both excellent holdings for the next 12-24 months.<\/p>\n

    Disclosures: LVMUY, DDAIF, DEO and BEAM are held by Sizemore Capital clients.<\/p>\n","protected":false},"excerpt":{"rendered":"

    By The Sizemore Letter It\u2019s a peculiar sort of problem when your economy grows at 8.1% in the first quarter and yet talk abounds of a \u201chard landing.\u201d\u00a0 American and Europeans haven\u2019t seen that kind of growth in decades\u2014and they could desperately use it today.\u00a0 Yet such is life is China; after years of growing … <\/p>\n

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