China’s Lowered GDP Forecast Won’t Hurt These Stocks

by Jim Woods | March 6, 2012 11:17 am

China bears licked their lips Monday, as word came out that the country cut its 2012 economic growth target from 8% to 7.5%. The lowered GDP guidance represents the lowest level in that metric in eight years. In addition to the lowered growth forecast, Chinese Premier Wen Jiabao said the nation needs to boost domestic consumption to reduce its reliance on exports.

The announcement confirms what many have expected — namely, that China’s economy is on the back end of a growth spurt that’s now causing a lot of discomfort for the world’s second-largest economy.

While the slowing pace of China’s GDP is a concern for the nation’s policymakers, the renewed focus on boosting domestic consumption actually is a good thing for the average Chinese citizen. Policies such as eased bank reserve ratio requirements will increase the ability of banks to lend, and that will put more money into the pockets of consumers.

Yet even without an increase in consumer spending, there already are approximately 13 million people that make up what could be called China’s “top 1%.” This is a group of well-heeled consumers who have the financial wherewithal to purchase virtually whatever they want. The slowdown in overall GDP growth is not going to materially affect this demographic’s spending. Taken together, a growing willingness to put more money in consumers’ pockets along with a huge wealthy consumer class makes China’s favorite consumption-oriented companies destined to keep growing.

So, which companies aren’t likely to be bothered by the nation’s lowered GDP forecast? Well, let’s start with one of the best stocks anywhere: Apple (NASDAQ:AAPL[1]). The status-oriented Chinese consumer loves Apple products, to the point where there was a mini-riot at the Apple store in January after the launch of the iPhone 4S was canceled because too many shoppers showed up. In China, an iPhone is more than just a communication device — it’s a symbol that you’ve made it in society, and that you’re a member of the social elite.

This status-oriented consumerism is why even relatively low-income Chinese consumers will spend a lot of money on coffee and beverages from Starbucks (NASDAQ:SBUX[2]). Walking around with a Starbucks cup and an iPhone is essentially a way of letting everyone know who you are, and that you have money and status. Other high-end status brands craved by Chinese consumers are handbags and leather goods made by Coach (NYSE:COH[3]) and LVMH Moet Hennessy Louis Vuitton (PINK:LVMUY[4]).

Of course, high-end consumer companies aren’t the only firms likely to be unaffected by a GDP slowdown, and positively affected by a focus on domestic growth. Internet search engine Baidu.com (NASDAQ:BIDU[5]) likely will continue to see growth, especially as more Chinese gain enough purchasing power to go digital and get online. Another sector likely to do well is gaming. Chinese consumers have demonstrated a strong penchant for gaming, and that’s good for Las Vegas Sands (NYSE:LVS[6]), the largest casino operator in Asia, with properties in Macau and Singapore, as well as the United States.

Finally, there’s restaurant giant Yum! Brands (NYSE:YUM[7]), the company behind the KFC, Pizza Hut and Taco Bell brands. Yum! has the recipe for success in China with KFC, which continues to be the No. 1 quick-service restaurant brand and the largest and fastest-growing restaurant chain in mainland China, with nearly 3,500 restaurants in more than 700 cities. Yum! has been opening one new restaurant every 18 hours, and now has a 40% market share among fast-food chains compared with just 16% for McDonald’s (NYSE:MCD[8]), according to data firm Euromonitor.

So, while there indeed might be a growth slowdown in China, that slowdown likely will leave the aforementioned companies unscathed. And, if China embarks on further policies to boost middle-class consumption, these companies — as well as their respective stocks — are in for even more upside going forward.

As of this writing, Jim Woods did not hold a position in any of the aforementioned stocks.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  3. COH: http://studio-5.financialcontent.com/investplace/quote?Symbol=COH
  4. LVMUY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LVMUY
  5. BIDU: http://studio-5.financialcontent.com/investplace/quote?Symbol=BIDU
  6. LVS: http://studio-5.financialcontent.com/investplace/quote?Symbol=LVS
  7. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  8. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD

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