US companies: Chinese mystery shoppers generate earnings disruption

In the West, theories about Chinese consumers are as elaborate, numerous, and often wrong as those about President Xi Jinping’s exact political intentions.

US companies expected Chinese shoppers to celebrate the end of lockdowns last year with a return to free-hand spending. Stocks with ties to China rose as investors piled on the reopening of trading.

First-quarter results from a number of blue-chip US companies show that the bulls were too bullish. A discount for China is still needed when it comes to investing in US companies heavily exposed to the world’s second largest consumer market.

Cosmetics group Estée Lauder, coffee giant Starbucks and chipmaker Qualcomm have all warned that a slower-than-expected economic recovery in China will weigh on sales. Stocks, which had priced in a rebound from China, have given up on gains for the year or are close to doing so.

Luxury goods companies are a notable exception. Tapestry, which owns the Coach and Kate Spade brands, reported a 20% quarterly increase in sales in China on Thursday. But the results have been flattered by easier comparisons. The company, which generated about 15 percent of its sales from China last year, suffered a mid-teens percentage decline in sales in the prior-year period.

Wealthy Chinese consumers will continue to buy expensive handbags no matter what. Investors in more prosaic stocks should temper expectations.

Estée Lauder is a case in point. Shares of the cosmetics group are trading at about 60 times forward earnings. This is a game of recovery, but the recovery depends in part on a solid performance in China which generates a third of sales. Qualcomm generates two-thirds of its sales from China. It trades on nearly 13 times forward earnings, above the one-year average.

The economy is growing modestly by Chinese standards. The country’s real estate market remains in decline. Youth unemployment has increased. This is reflected in the performance of the national stock market. Both the MSCI China index and the CSI 300 index have lagged the S&P 500’s 8% gain this year.

After falling 15% in 2022, the MSCI World China Exposure Index, which tracks 50 high-revenue Chinese foreign companies, has gained 4% this year. The best theory about Chinese consumers is that, like Xi, they will continue to defy any positive Western expectations.