Retail: China Rate Move is Material


Here’s a question the average Retail analyst is not asking, but should.  “What is the relevance of China’s move today to raise rates (again) by 25bps to 300bps above Fed Funds?”


Our Macro team has been all over how Asian (and even global) growth is slowing on the margin, yet global inflation is accelerating. As Keith put it this morning,


“…the Chinese and Indian governments are going to perpetuate this investment theme, as they do not get paid to be willfully blind to the effects of inflation on their common people over the long term. In other words, China is doing what it has to in order to address what Bernanke refuses to.


In the short-run, this is the pain that Asian central bankers are willing to impose on their stock markets. Over the long-run, seeing inflation destroy their sovereign bond markets, corporate margins, and their citizenry’s buying power is a really bad idea”


Will this immediately hurt US/European brands who will notice a near-term slowdown in demand in China? Our sense is that the answer is ‘probably not.’


Does it mean that it ups the ante for US companies looking to China to find cheap labor given that wage pressure and product costs have already resulted in higher product costs out of Asia? Probably.


The bottom line is that at any given time, China is incrementally exporting more inflation (to US) or importing inflation. Neither is a particularly comforting place to be. The best positioned companies are those who have a revenue base in China that is similar in size to its sourcing business. Being net neutral Yuan/USD is the lowest risk model. That’s Nike and Adidas. Ralph Lauren also screens well.


Other global brands/supply chain partners like Li&Fung, H&M and Inditex are probably Ok. 


US brands that sell 100% in the US and have 100% of product manufactured 8,000 miles away are – for the most part – in trouble. We still think estimates are too high out there by 10-20%.

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