For three of the past four quarters, China has been mired in a #Quad4 recession. The Hedgeye forecast calls for a brief oscillation into Quad 2 for Q4 2023 before entering a period of stagflation to start the new year.
Our call to short the country this year has paid off (see the "Bad News" below). As we said in our Q3 Macro Themes, "The Chinese economic engine won’t be bailing out global growth as it did in the Post-GFC period. The promise of a great Chinese reopening has underdelivered, and the developed market consumption shift from goods to services has additionally weighed on Chinese manufacturing activity."
However, if you know where to look, there are places to find growth in any economic environment. Below is a brief look at the mixed bag of investing opportunities in China.
Felix Wang is one of several Hedgeye analysts to introduce a weekly sector-specific webcast this month. In today's episode of The China Show, which airs live at 10am ET every Wednesday, Hedgeye's China analyst walked through which stocks he's buying and selling.
Of his 12 highest-conviction longs, Wang's largest position is in MINISO (MNSO). The low-cost, China-based retail chain specializes in household and consumer goods including cosmetics, toys and kitchenware.
What caught Wang's eye is the company's growing social media presence, particularly in key markets like the U.S., Mexico and Indonesia.
"MINISO's official Instagram account saw its followers skyrocket 70% since February," Wang says. "By comparison, a couple competitors like Daiso and MUJI grew minimally. One big contributor is the big-time Times Square flagship store that opened earlier this year. That's gaining new eyeballs for MINISO."
The inventiveness on display by MINISO is missing from the country as a whole. As we noted above, shorting China was one of our top themes in Q3.
Keith McCullough added Hong Kong (EWH) as a short on July 3, and the ETF is down -8.7% since.
This morning, our CEO noted on Twitter that the Chinese bear market continues. The Shanghai Stock Index (SSEC) was down another -0.8% overnight, and down -10% from its May highs.
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Starbucks (SBUX) is one of the Hedgeye Consumables team's "Best Idea" Shorts, but like MINISO, the coffee maker is among companies rolling out a new strategy to improve its footing in China.
"Starbucks is catering to local preferences in China by introducing a more petite 259 ml cup size, part of the 'Intenso Collection.' This cup contains more espresso and less milk or cream, offering a more intense flavor than the larger cups favored in the U.S. Priced at 33 yuan ($4.51), this new size is considerably smaller than Starbucks' regular tall, grande and venti options."
Starbucks remains a high-conviction short for the Consumables team, but this news represents a major strategy change in the company's second-largest market. Penney said the plan is to introduce the Intenso Collection to 9,000 stores by 2025, and possibly expand beyond China depending on customer reception.
The Consumables team also rolled out its new weekly webcast this week, airing at 12pm ET Mondays. Click here for more information.