Portfolio | China consumer goods saturated but services to grow
Oversupply and labour costs hurting manufactures as economy shifts to services
Not all consumer stocks are poised to benefit alike from persistent income growth and household spending in China, analysts say, with the fortunes of the goods and services sectors set to diverge in the coming year.
Mass market consumer goods companies face lingering price deflation in a low-inflation environment along with flat sales volumes in overcrowded markets. Meanwhile, marketing and labour costs are rising, according to a report from BNP Paribas last week.
“We recommend investors reduce exposure to mass market consumer goods,” said Charlie Chen, a BNP Paribas analyst. “Reverse operating leverage is likely to hit these companies.”
Analysts say industries from food and beverage to retailing remain burdened with overcapacity, notwithstanding the suspension of expansion plans by many companies.
Cutting obsolete and idle capacity in China is not easy and will take time due to social responsibility concerns
“Cutting obsolete and idle capacity in China is not easy and will take time due to social responsibility concerns,” Chen said.
Even if capacity can be reduced, the marketplace is increasingly crowded with competing foreign brands, which are winning consumer preference and becoming increasingly affordable amid lower transportation and logistics costs and reduced import tariffs.