MorningWord 3/23/16: Keeping Up With The AngelaBabies

by Dan March 23, 2016 11:32 am • Commentary

On CNBC’s Fast Money, my co-panelist Tim Seymour and I have had a little back and forth of late on the notion that some market participants/pundits (not me) confuse the volatility in the Chinese stock market and the economy itself.  As a market pundit I try not to confuse an economy and a country’s corresponding stock market, but I do think there is some correlation to be found on a “wealth effect” with certain consumer discretionary items. The rise and fall of China’s Shanghai Composite over the last year affects (or is foretelling) some company’s fortunes more than others. For instance, the demand for aspirational consumer discretionary items in China’s rising middle class for products like Apple iPhones, Nike Air Jordans and Starbucks Lattes.

Let’s start with the fact that AAPL, NKE & SBUX make premium products, that sell for premium prices, and in the case of NKE and SBUX the stock’s trade at premium earnings multiples.  Regardless of your view of the Chinese economy, these sort of aspirational brands for hundreds of millions of emerging consumers in China will likely be the last battle fought if the country continues to see slowing growth, this year expected to be a 25 year low in GDP terms.

So in light of NKE’s results last night that has the stock down 4%, let’s talk about how these three companies are dealing with the potential pitfalls of hyper growth turning into the deceleration of said growth.

Last night NKE reported a mixed quarter and guidance, but the highlight was certainly China futures orders, up 36%, (but excluding currency affects, up 20.7%).  That delta is a big hmmm given where the dollar is relative to a year ago, and its recent weakness in the last month or so. Main point here is that it might be as good as it gets in China in this macro environment, and while China was about 10% of NKE’s sales last year, much of their future growth is expected in the country.  This will likely be a bumpy ride.

Starbucks, obviously a very different price point, but if you add up 10 to 20 lattes a month you get to a serious spend.  SBUX has disappointed in comps in China for 3 quarters in a row, but CEO Schultz remains very bullish and hopes to nearly double his 2000 stores in 100 cities in China by 2020.  Again this may be a volatile ride as sales growth in developed markets increasingly rely on products other than coffee.

And AAPL. You know the drill here. Sales in China now account for about 25% of the company’s sales, which until the Sept quarter had been growing 100% year over year, but rose just 14% yoy in the December quarter reported in late January.  The Chinese consumer that Tim Cook has basically pinned his company’s future growth on might be reconsidering spending on average about 14% of the annual household income on an iPhone.

Which brings me back to the Chinese stock market, yeah this piece of garbage:

Shanghai Composite 2 year chart from Bloomberg
Shanghai Composite 2 year chart from Bloomberg

Last year as the Shanghai Composite was staging an epic 100% rally from 2500 to 5000, Credit Suisse estimated that it was retail investors who were driving much of the stock market frenzy, per Business Insider from July 9th, 2015:

The bank says about 258 million stock-trading accounts are open on the Shanghai and Shenzhen exchanges, China’s two major ones. A high proportion of those are likely to be retail investors, with a third of the total opened in just the past nine months.

As you can see below, that dwarfs the population of most Asian countries and is over 80% of the US population.

Credit Suisse stock trading accounts China.Credit SuisseCredit Suisse’s graph of stock-trading accounts in China against populations.

So does it make sense to consider the potential that once the Shanghai Composite, the second largest stock market in the world topped out in late June 2015, losing trillions of dollars in market capitalization, that Chinese Consumers, many speculating in the stock market on margin, had far less disposable income in the second half of 2015 to buy iPhones, Air Jordans and Lattes??  Sure it does. How could there not be an adverse affect of a market crash on consumers of aspirational consumer discretionary products that cost a disproportionate of China’s emerging middle class’s annual household income?