While global investors worry whether they are well positioned for the return of inflation, the Chinese aren’t concerned. They believe recent experience has identified the kinds of stocks that will be heavy hedges against surges in the cost of living. And so, if anything, they’ve perhaps binged too much on eating and drinking.
While the U.S. market is dominated by the FAANG stocks — the five technology giants that account for over 20% of the S&P 500 Index — Big Food (and Big Liquor) seem to be the market indulgences of the Chinese. The CSI consumer staples index almost doubled from a year earlier. Muyuan Foods, a pig farmer, rose 88%. Meanwhile, soy sauce maker Foshan Haitian Flavoring & Food Co. boasts a higher market value than state-owned oil producer CNOOC Ltd.
A look at the top holdings of mainland mutual funds might make you worry about alcoholism in China. As of the end of 2020, the latest data available, three baijiu manufacturers, Kweichow Moutai Co., Wuliangye Yibin Co. and Luzhou Laojiao Co. Ltd. took up the top spots, followed by Hong Kong-listed Tencent Holdings Ltd. and Meituan, data compiled by CICC show. In China, Big Food is bigger than Big Tech.
Even the meteoric run by a few tech names this year was premised on food. The delivery app Meituan, for instance, returned 36% year-to-date to reach a $300 billion market cap because the investors were excited by Meituan Select, a grocery e-commerce initiative where people band together to buy at better prices. Online fresh food sales are expected to double to about 820 billion yuan (nearly $127 billion) in 2023 from last year, according to iResearch. Sequoia-backed Dingdong Maicai, which competes with Meituan Select, is considering an initial public offering in the U.S. as soon as this year.
So why are the Chinese so enamored of food makers? Confucian tradition may deem eating and drinking as natural and basic human rights, but investing in the consumer staples and food distribution is a choice inspired by Chinese wallets.
For two years in a row, China’s tame headline inflation figures belied how much various fresh food categories have eaten into middle-class budgets. In 2019, when pork prices were rising with the swine fever epidemic, the cost of fresh fruit soared, too: An apple cost almost 20% more that May than it did a month earlier. Late last year, just when pork prices finally stabilized, the cost of fresh vegetables — cabbages, peppers, green onions and the like — made Chinese shoppers groan again.
The government blamed bad weather in 2019, and again in 2021, even though there is also a lot of waste in the grocery supply chain. Roughly 15% of fruit goes rotten and unsold, three times more than in other developed nations like the U.S., estimates Hua Chuang Securities Co.
And so, since 2019, investors have been betting that the government will not get things right, that inefficiencies will continue to dog the supply chain, and that prices will rise. Why not, then, invest in the companies that will be charging higher prices? Consumer-staples companies, whether they sell online or in stores, will not face the same deflationary pressures as other industries. In China, consumer companies have enormous pricing power. For example, in the last decade, the wholesale price of a bottle of Moutai has gone only one way: up. The last price hike in January 2018 was a meaningful 20%.
That’s in contrast to the rest of the economy, which has been plagued for the last decade with falling producer prices — and long, painful stretches of depressed corporate earnings. China fell into a producer deflation in early 2012 that lasted until late 2016. And then the nation re-entered deflation less than three years later.
The Chinese are paying dearly for their Big Food investments. In the last four trading days, those stocks on average tumbled 8.5%, just as the central bank tightened liquidity and risk-free rates crept up. With the 10-year government bond yield at 3.26%, anything valued at above 30 times earnings is a bit hard to swallow. Experience may say that food prices will somehow always jump, but the math of market fundamentals is flashing alarms: The sector on average trades at 33 times 2021 earnings, according to data compiled by Bloomberg.
Still, every time there’s a price spike in pork or vegetables or fruit or Moutai somewhere in the country, China’s investors rush to buy their Big Food stocks. Americans are paying a lot for growth — the Nasdaq Composite Index is at its most expensive since the dotcom days — the Chinese do the same with their own favorite stocks. Inflation — if it happens in a significant way — will only make Big Food shares surge even more. At the very least, they can eat their investments.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets.
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