A Crisis of Consumer Confidence? Not Here!

Did you know that roughly 70% of the U.S. economy is comprised of consumer spending? That is the money that you and I spend at the grocery store, the shopping mall, at car dealerships, and at our favorite restaurants.

That's a statistic investors should never forget.

Another number to note is how spending changes year-over-year, because it's a useful gauge of consumer confidence.

Right now, though, you might look at the numbers and wonder, “What confidence?”

To be fair, sales at 14 of the largest shopping malls in the United States did go up during the last 12 months. Unfortunately this increase was a measly 1.7%, per the International Council of Shopping Centers.

It looks even worse when compared to the 5.1% increase in January … and well-below the 6.7% increase in February 2012.

Whether you want to attribute sluggish U.S. sales to the re-imposition of the 2% payroll tax, the weak job market, higher gasoline prices or just our overall sluggish economy, it is clear that Americans aren’t spending money on a whole lot beyond necessities right now.

Yet, many retailers are far from worried. Why are they so confident?

Where I’m Counting on Consumers to Spend Big Bucks

We could see a bump going forward in the United States now that tax-refund season is in full swing. But one place where consumers are spending money hand-over-fist without that kind of once-a-year catalyst is in China.

That's because spending — especially on luxury items — is in full swing there.

  • According to China’s National Bureau of Statistics, retail sales jumped an impressive 12.3% in the first two months of 2013.
  • The Chinese Ministry of Commerce reported that retail sales during the Chinese New Year, which ran Feb. 9-15, increased by 15% compared to last year. Jewelry sales were extremely strong, with a 38% year-over-year increase.

“Across the country, products were abundant, supplies were sufficient and sales lively,” reported the Ministry in a press release.

This buying spree also extends to big-ticket items. To wit:

  • The China Association of Automobile Manufacturers reported that Chinese auto dealers ordered 2.84 million new cars in the first two months of 2013, a whopping 20% increase from 2.37 million cars a year ago. Audi, by the way, is the top-selling luxury car in China.

Those strong retail numbers match the acceleration in the Chinese economy. In the fourth quarter of 2012, China’s GDP expanded by 7.9%, the first increase after seven-consecutive quarters of weakening growth.

The Chinese economy is undergoing an intentional MONUMENTAL transformation from an export-dependent manufacturer of low-margin trinkets to a consumption-driven economy powered by its own internal growth and wage growth.

China’s leaders don’t like being dependent on the West for its exports, so it is intentionally focusing on growing its internal domestic demand.

China’s 12th Five-Year Plan (2011-‘15) prioritized more-equitable wealth distribution, increased domestic consumption, improved social infrastructure, and social safety nets. The plan is representative of China’s efforts to shift its emphasis toward domestic consumption.

I see more Louis Vuitton handbags in Beijing than I do in Boston. I see more Apple iPhones glued to ears in Shanghai than in Seattle. And I see more customers lined up at KFC stores in Hong Kong than in Houston.

There is one ETF that is well-positioned to profit from the Chinese consumer spending boom: the Global X Chinese Consumer ETF (CHIQ).

One drawback of that retail-focused ETF is that it doesn’t give you any exposure to the retailers that are profiting from the Chinese obsession with Western designer labels and luxury goods.

Goldman Sachs (GS) estimates that Chinese consumers spent a total of $46 billion on luxury products in 2012, Bain Capital reported that China purchased 25% of all the luxury goods in the world last year, and McKinney & Co. says this percentage will grow to 30% by 2015.

Things I’ve never seen before — like wine tastings and yacht clubs — are sprouting up in China. And all those status-conscious millionaires are eager to display their success.

While Chinese millionaires don’t want to be seen as “baofahu” or newly rich, they use luxury products to obtain status, prefer classic brands rather than trendy ones, and heavily rely on celebrities for guidance on what to buy.

France-based Hermes International, maker of the celebrity-friendly
Birkin bag, is a $250-plus retail stock.

Companies like Tiffany & Co. (TIF), Prada (PRDSY), Coach (COH), Michael Kors (KORS), Ralph Lauren (RL) and LVMH Moet Hennessy Louis Vuitton (LVMUY) are some of the prime beneficiaries of that spending boom and are doing big business in China.

And that’s only the tip of the luxury-spending iceberg. Here are two Western companies that are doing big business in the East.

Example #1:

L’Oreal (LRLCY) just reported that its China sales jumped to US$2 billion, a 12.4% year-over-year increase. Even-more-impressive is that L’Oreal has enjoyed 12-straight years of double-digit sales growth in China.

And while you may think of France-based L’Oreal as a very Western company, it gets a full 40% of its total sales from emerging markets.

Example #2:

China is Apple’s (AAPL) second-largest market after the U.S. and saw its sales sure by 60% in the fourth quarter of 2012. I have personally visited three Apple stores in China, and I can tell you that they are constantly filled with customers from the time they open their doors in the morning until they close at night.

I am not suggesting that you rush out and buy any of these stocks or ETFs tomorrow morning. As always, timing is everything so I recommend that you wait for them to go on sale or for my buy signal in my Asian Century service.

There is no question in my mind, however, that investing in the companies that cater to the affluent Chinese shoppers is an excellent way to tap into the lifestyles of the rich and famous ... Chinese style.

Best wishes,


This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.

Posted 03-15-2013 3:35 PM by Tony Sagami