Monday was brutal across the board for Chinese equities, but more pain could be lurking.
The CSI 300, an index of China's biggest stocks, fell by 7%, marking the worst start to a year for Chinese equities. Small-cap stocks didn't fare any better, many plunging by the daily maximum of 10%. Fear obviously blew back onto our shores; the late-day buying on the Dow and S&P 500 was little consolation amid chatter on Wall Street of a complete collapse of the Chinese economy in 2016.
Say hello once more to the word "contagion," a term that mostly has been relegated to the dustbin after the Great Recession.
But even amid the darkness just one trading day into the new year, there was still a sense the Great China Slowdown of 2016 would be buffeted by the country's consuming class. Every executive who has visited China in the past year-- either to scout new business opportunities or review existing businesses --- continues to be optimistic about China's consumer, in large part as more households move out of ridiculous levels of poverty. They wax poetic on how a new sneaker, for example, instantly could be out of stock in the country because the Chinese are becoming wealthier. It's as if this was the China of 2008, not the one of 2014, 2015 and 2016 experiencing fundamental problems.
Further aiding the entrenched optimism on China's consumers is that Western companies, from Starbucks (SBUX) to Coach (COH) to Nike (NKE), continue to set up shop in the country to hawk their wares to an increasingly well-off middle- to upper-income Chinese consumer.
The numbers to support the optimism floating around board rooms and Wall Street are compelling.
The number of China-based consumers shopping U.S. brands online over the holiday season in 2015 increased an impressive eightfold versus 2014, according to Ant Financial Services Group's Alipay. China's service economy grew 8.4% in the first nine months of 2015, whereas manufacturing was only up 6%.
In a recent survey, research firm Nielsen projected that aggregate consumer spending growth in China would be about 5.2% a year for the next 10 years. That rate of growth likely will dwarf what is delivered by major economics such as the U.S. and Japan, which have consumer bases continuing to count pennies and plan for the future.
Still, it's time those rose-colored glasses on China's consumer come off to better match what is happening elsewhere in the economy. And in doing so, one will find a good reason to be concerned about a material pullback this month in Chinese equities, and possibly in U.S. markets, too.
My attention right now is on the pullback in shares of consumer-oriented U.S. multinationals doing business in China. It's something investors are not discussing because the likes of Starbucks and Nike have yet to report sluggish results from China related to second half 2015. But, in the mind of the market, those slowdowns loom large in the first half of 2016, and seeing them could trigger downward estimate revisions and pressured multiples as companies lose a key source of red-hot growth.
Here's what you'll find in the chart:
Coach shares have gone haywire in the past month, outperforming Chinese equities. Yet, the company gets about 14% of its annual sales from the country.
Shares of Tesla (TSLA) have lost about 3.3% in the past month, falling under pressure Monday as deliveries came in near the low end of expectations. The company likely will have increasing trouble in China (it already hasn't been doing particularly well) due to the economic slowdown.
Starbucks shares, down over 5% in the past month, offer a nice sign of a market finally starting to catch on that the Chinese consumer outlook is a big, underappreciated risk. By the end of 2015, Starbucks planned to have 1,500 stores in China.
Also offering up some concern is Nike's stock, which is down roughly 6% in the past month despite strong China sales and earnings in the most recent quarter.