China slowdown has some U.S. investors moving to consumer stocks

Published 11/08/2015 in Culture, World News

NEW YORK/BOSTON The slowdown in the Chinese economy, which prompted the Chinese government to devalue the yuan currency on Tuesday, has already hammered the shares of U.S. industrial companies.

Yet some contrarian U.S. fund managers say there is still room to prosper by focusing on U.S. companies that target Chinese consumers. They say consumers who have benefited from the country’s expansion over the last decade show few signs of curtailing spending on products like high-end leather bags, cruise ship vacations and Starbucks coffee.

“Even with the slowing growth, there’s still more money in people’s pockets,” said Dan Kern, president and chief investment officer at Advisor Partners in Boston. He has been selling shares of materials companies like Alcoa Inc and moving into shares of Apple Inc, which have been hurt lately by concerns about spending in China.

Like Kern, other portfolio managers say that they are buying shares of U.S. and European companies that benefit from consumer spending in China despite an economic slowdown that has seen the Chinese economy’s growth rate start to slow and its stock market to falter.

Portfolio managers from firms including Buffalo, USAA Investments, and Federated Investors are rotating out of industrial and materials companies in favor of consumer stocks that provide something of a back door into investing in China.

Some of these managers point to data such as the closely-watched Westpac MNI China Consumer Sentiment survey. The survey’s rating of consumer confidence rose in July despite being conducted during the Chinese domestic stock market’s 35 percent selloff, suggesting the country’s consumer confidence is not tied to its equity markets.

Among their recent purchases: Royal Caribbean Cruise Lines, Carnival Corp, and sportswear company Under Armour Inc, which told analysts in its recent earnings call that its Chinese growth remains a “key story” for the company.

The moves come at a time when the shares of companies with major sales exposure to China are falling.  The average year to date return of the 20 U.S. stocks with the highest sales exposure to China is a negative 6 percent, compared with a 2 percent gain for the average company in the S&P 500, according to Goldman Sachs research.

Semi-conductor maker Skyworks Solutions Inc, the most exposed company in the S&P 500, according to Goldman, has seen its shares fall 20 percent from their peak in June. Roughly 83 percent of Skyworks revenue comes from China.


John Toohey, head of Equity Investments at USAA Investments in San Antonio, who personally oversees “$16.5 billion, said Beijing’s move to devalue the yuan “reinforces our view that heavy industry in China is struggling … the concern we now have is that the devaluation is not a one time event, i.e, the economic situation in China is worse than we thought.”

Yet while his firm has stopped buying some mining stocks, it has added shares in cruise lines like Royal Caribbean Cruises Ltd and Carnival Corp. He believes both companies can increase sales in China.

“It’s a high-growth market. The ships fill fast and they’re not discounted,” Toohey said.

Not every fund manager has an optimistic a view, of course. Frank Barbera, portfolio manager at Sierra Investment, said China’s currency decline will force U.S. companies like YUM Brands Inc, which operates Pizza Hut and KFC restaurants in China, to lower their profit margins at a time when revenue growth among the S&P 500 has been slowing for the past two quarters.

“Right now is a great time to play defense and review risk rather than try to make a bet on something that’s in the early innings,” he said.

Yet Stephanie Link, equities portfolio manager for TIAA-CREF, said she is finding U.S. companies that can sustain growth amid China’s slowdown. She was buying shares of coffee retailer Starbucks Corp even before its most recent earnings report on July 23, when it said comparable-store sales in its China/Asia Pacific region grew 11 percent, she said.

“When you have that kind of growth in an economy that’s challenging, imagine how they would do when things get better,” Link said.

(Reporting by David Randall and Ross Kerber- Editing by Linda Stern and Frances Kerry)


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