China’s long-awaited recovery from the coronavirus crisis is faltering as the world’s second-biggest economy faces mounting deflationary pressures, a housing market crisis, sluggish growth and record-high youth unemployment – creating a maze of impediments to the club’s most vulnerable holdings . However, we still believe that China’s economic recovery is on the horizon. And in the meantime, our China-focused names are poised to weather the storm while finding alternative growth avenues. “We’re hearing that China is dragging the rest of the world, including us, into the abyss. But we’ve seen this movie before and we know how it ends,” Jim Cramer said earlier this month, referring to the 2015 Chinese stock market crash and subsequent rebound. Still, the challenges are significant. Since Beijing eased its Covid-19 restrictions late last year after three years of intermittent lockdowns that weighed heavily on growth, the world’s second-largest economy has failed to recover as investors had expected. Instead, after decades of excessive borrowing and overbuilding, a crisis in the real estate market has deepened. Housing problems aside, manufacturing activity is contracting, the youth unemployment crisis is mounting and consumer spending remains sluggish. Earlier this month, the People’s Bank of China cut interest rates for a second time in a bid to shore up the economy amid rising risks of deflation. With these macro headwinds slowing the growth of some of the club’s key holdings, here’s why we’re sticking with these China-exposed names – and how everyone is reacting. EL YTD Mountain Estee Lauder (EL) Year-to-Date Performance Of our 35-stock portfolio, Estee Lauder (EL) has been the hardest hit by the weakness in China, accounting for approximately 30% of total sales to the country. However, with management signaling that the cosmetics company’s results are likely to improve sometime in the next year, we are cautiously optimistic about the stock. Using the recent weakness – the stock is down more than 33% year-to-date – we bought 100 shares of Estee Lauder on Monday at $154.11 a share. The Asia-Pacific company’s latest quarterly results came in better than Wall Street had expected, although Estee Lauder’s management said retail sales in China, particularly in the Hainan region, were deteriorating. “Significant short-term headwinds” remain in the country, management said. And the company’s highest-margin product category, skincare, also remained under pressure due to the slow recovery of travel retail in Asia overall. Nonetheless, we believe that the situation is gradually improving and that the upside far outweighs the downside risk at current levels. A`L YTD Mountain Apple (A`L) Annual Output Apple (A`L) has relied on China, a key manufacturing base for the company’s products, for years. But the tech giant is gradually shifting its focus to emerging markets to diversify its supply chain. Key to this effort is the company’s expansion into India, which has emerged as one of the top iPhone markets this year, according to Counterpoint Research. Additionally, in April, the company opened its first two retail stores in the world’s most populous country. CEO Tim Cook later told CNBC in June that India represents a “huge opportunity” for the iPhone maker. Greater China – a term the company uses to describe Taiwan and Hong Kong alongside mainland China – is Apple’s third largest sales region after America and Europe. However, the region saw three consecutive quarters of declines in sales. This has further accelerated Apple’s production shift from China to India. The company’s rapid expansion in the Southeast Asian country will help it diversify its revenue streams and grow its bottom line as it gains more market share and continues to make the Big Tech name an “own it, don’t trade it” stock . SBUX YTD Mountain Starbucks (SBUX) Year-to-Date Performance Starbucks’ expansion in China is central to our investment thesis on the stock as it is seen as a long-term growth driver for the coffee giant. China is Starbucks’ second largest market after the US. And while China currently accounts for about 9% of total Starbucks sales, compared to 73% in the U.S., the coffee chain operates more than 6,200 locations in the country and is on track to reach its goal of 9,000 stores by 2025. That means Starbucks has room to grow as Chinese consumer demand eventually recovers, making us long-term holders of the stock. In the company’s third-quarter results, Starbucks continued to see improvement in China, with sales there rising an impressive 46% year over year. “China’s coffee category is poised for growth, supporting Starbucks’ expansion in the country,” Bernstein analysts wrote in a recent statement, amid increasing competition in the country. WYNN YTD Mountain Wynn Resorts (WYNN) Year-to-Date Performance Wynn Resorts (WYNN) second-quarter results showed that China’s Macau SAR — one of the largest gaming hubs in the world — is a rare bright spot for the Chinese economy. Yields from Wynn’s properties in Macau rebounded to 72% of pre-coronavirus levels in the second quarter, beating analysts’ forecasts. The company’s management also said that the momentum in gross gaming revenue continued in the current quarter. “Due to the fact that we expect China to still be at least a year behind the US in terms of recovery, we see no reason why demand in Macau should slow anytime soon, even if there is a slight slowdown in the China Macro leads,” Stifel analysts wrote in a research note following Wynn’s results earlier this month. The Macau recovery remains the lynchpin of our investment efforts in Wynn and the recent uptick in pent-up demand in the casino hub shows it should continue to be the revenue driver for Wynn. (Jim Cramer’s Charitable Trust is Long EL, SBUX, A`L, WYNN. For a complete list of stocks click here.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling any stock in his charitable foundation’s portfolio. 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A pedestrian street on Nanjing Road on October 1, 2022 in Shanghai, China.
Yan Daming | Visual China Group | Getty Images
China’s long-awaited recovery from the coronavirus crisis is faltering as the world’s second-biggest economy faces mounting deflationary pressures, a housing market crisis, sluggish growth and record-high youth unemployment – creating a maze of impediments to the club’s most vulnerable holdings .
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