Back during the height of China’s consumption boom, the first half of November was all about ‘Singles’ Day’, which is China’s answer to Black Friday in the US. The online shopping giants released mind-boggling numbers that were even more astonishing than the ones posted the year before. Since the pandemic, however, there has been an eerie silence around the shopping phenomenon in China. This may be due, in part, to changing political priorities, since Chinese policymakers do not appear to view private consumption as the key to future prosperity. Or it may simply reflect the hard times the Chinese economy has faced since the real estate market imploded.
Yet the focus may soon shift back to the consumer space, because the Chinese behemoths in the online space are set to report their numbers this week, and have been gaining market share through e-commerce. While the US, the leader of consumerism, has seen a slowdown of its own, the sheer difference in consumption between the US and China shows how far ahead the #1 economy (the US) is from the #2 economy (China). That said, Chinese policymakers have made sure to avoid a full-blown meltdown in their domestic economy by loosening the monetary and regulatory reins substantially over the past few weeks.
Digital commerce: an uncertain environment
While the economic environment has improved globally in terms of real wages, growth, financial conditions, and consumer sentiment compared to last year, things are softening once again since the summer and the same could be expected going into the holiday season.
Generally, companies have low visibility going into the holiday season and expect a heightened promotional environment as consumers might stay on the sidelines unless prompted by a good deal. The heightened level of competition is also of concern given that some Chinese companies are gaining market share in the US through e-commerce.
This uncertain environment is confirmed by findings from the McKinsey Consumer Pulse Survey. In particular, the survey shows that the shopping season is becoming longer as consumers start shopping earlier and look for bargains for longer. Furthermore, 79% of consumers, mostly in the lower income and younger generation brackets, said they are slowing down (vs 74% in 2022), while 66% said that they rank prices and promotions as their top considerations this year.
China: Looking for opportunities in a stagnant market
After three consecutive years of negative returns, 2024 is likely a year of stabilisation for China, however, we do not expect a strong recovery in the equity market. Many of the structural challenges we have identified in the past are still in place. In our view, Chinese equities are currently facing a similar situation to that of 2011–2015, when China experienced a long rebalancing of its economy.
This means that the Chinese equity market may experience a prolonged stagnation, as the country takes time to solve structural issues and develop new drivers of growth. Nonetheless, a positive spin is that we are at the low end of the current trading range. A tactical rebound in the near term is possible, especially as the market seems to be raising expectations on government policies and there are hopes that more proactive stimulus measures may help buffer the economy.
UK growth bitten by higher inflation and tighter rates
Due to the combination of still-high inflation and tighter monetary policy, last Friday’s UK gross domestic product (GDP) data showed that economic growth stalled in the third quarter of 2023. Looking ahead, we expect growth to remain weak in the last quarter of 2023 and in the first half of 2024. Tighter financial conditions due to higher interest rates will remain a drag on consumption, and a gradual recovery is only expected in the second half of 2024.
As inflation continues to recede, weak growth is a further deflationary force that reduces the necessity for the Bank of England to hike rates further. The pound sterling has lost the support it had received earlier this year from robust growth and rising rates, which made it the best-performing G10 currency. With the market’s rate expectations trimmed down to a firm hold, the currency is now more exposed to the weaker macroeconomic data.
What does this mean for investors?
While the economic environment has improved, there are no signs of a new consumer boom in the making. The headlines remain dominated by geopolitics, and in our view, this backdrop speaks strongly in favour of quality stocks. The ‘boring’ ones are boring in a good sense, as they are reliable.
Overall, we maintain our Neutral rating on the Digital Commerce theme due to the uncertain economic environment, growth challenges in key markets and the heightened competition. We recommend investors be selective and focus on companies operating in attractive segments like travelling, logistics and payments.