China feels pinch of reduced consumer spending, trade war

China’s economy and equity market will navigate a period of weaker consumption and deleveraging.

China’s economy and equity market will navigate a period of weaker consumption and deleveraging, contributing to a broader slowdown in economic growth, UBS head of China strategy Wendy Liu predicts.

Speaking on the sidelines of the UBS Greater China Conference, Ms Liu said that despite China’ s economy being buoyed by infrastructure projects, US trade ructions were having a negative impact and consumers were reining in spending.

She expects a moderation in China’s GDP in the December and March quarters.

“We’re running into a bit of a bump,” she said. “So how do we sort of navigate through this bumpy period and still get good outcomes from the financial market?”

Ms Liu highlighted that UBS sector analysts had cut their 2018 and 2019 earnings estimates for 13 of 23 sectors under their China coverage because of factors including a pullback in consumer spending, weakening pricing power and more competition.

Part of the reduction in spending involved China’s consumers being more prudent on purchases, including opting to holiday closer to home and a pick-up in the purchase of less-expensive private label brands.

China’s GDP rose 6.5 per cent in the three months ended September 30 from the same quarter in 2017, marking the slowest pace since the fallout from the global financial crisis in 2009.

Consensus estimates put China’s GDP in 2019 in the order of 6.1 per cent to 6.2 per cent.

“We are testing the boundary in 2019,” Ms Liu said. “We are going to try to test the boundary and then we are going to come back. We need the overall activity to be more upbeat, and for the listed universe, but most important to them is to have nominal growth because this is the revenue.”

Prior UBS analysis has pointed to “a V-shaped China equity return pattern” this year, which sees earnings multiples ­re-rate “sometime in the second half”.

The UBS conference in Shanghai — where there are 2800 attendees — has delved into a host of topics including China’s growth prospects and how negotiations with the US over a trade dispute may play out ahead of a March deadline.

Ms Liu this month launched UBS’s China equity model portfolio, which showed a preference for the internet, property and defensive sectors while cash accounted for 15 per cent of the portfolio.

“In constructing our model portfolio, we looked at margin resilience, earnings growth plus valuation,” the research note said.

“We prefer stocks with margin expectations already cut as in the case of China internet or margins that may improve from 2018 onward on idiosyncratic reasons.

“Our analysis shows that consensus margin forecasts for 2018-19 are at near 10-year peaks for tech, healthcare, discretionary, staples, industrials, materials, gas distribution and renewables; and at 10-year lows for internet, education and water and environmental services.”

The UBS model portfolio includes stocks such as China Mobile and internet and technology giants Alibaba and Tencent.

The author travelled to China as a guest of UBS.