Economic stimulus in China would be a win for 3 stocks tied to Chinese consumers

Published Tue, Jun 13 20234:20 PM EDT

Soft post-Covid economic activity in China could bring on more stimulus support there — a move that would be a boost for Estee Lauder (EL), Starbucks (SBUX) and Wynn Resorts (WYNN). These are companies in our Club portfolio with considerable exposure to the world's second-largest economy. Mixed messages Worries about the Chinese economy have already prompted China's central bank to cut a key policy interest rate . Tuesday's rate reduction, the first such move since August, came after China's state-owned banks last week cut rates for depositors. China's economy has been struggling to reach its full growth potential after Beijing abandoned its zero-Covid policy. The recovery in China has been much slower than what other major countries experienced when they lifted their pandemic restrictions. It shows in many of China's important sectors. Real estate activity — which is estimated to make up nearly 30% of Chinese gross domestic product (GDP) — has seen slower home sales , unfinished projects by developers, and homebuyers stopping their mortgage payments. New home sales in China for the week ended May 28 increased by 11.8% from a year ago, a significant slowdown from 24.8% growth a week earlier, according to a report by Nomura's chief China economist Ting Lu. Moreover, China's new home prices fell 0.01% month-over-month in May after rising 0.2% in April, according to survey data from the China Index Academy. China's labor market is also struggling. Official Chinese data shows urban unemployment among 16- to 24-year-olds rose to a record high of 20.4% in April — about four times more than the broader unemployment rate in the country. Still, the Chinese consumer has proved to be resilient in the face of these broader economic challenges. China's April retail sales of consumer goods increased by 18.4% year-over-year , according to the National Bureau of Statistics of China, a sharp increase from March's 10.6% increase . To start the year, China's economy in the first quarter saw robust growth — a better-than-expected reading of 4.5% , according to China's National Bureau of Statistics. It marked the fastest pace of growth since the first quarter of 2022, fueled by higher spending from Chinese consumers. Club stock results Recent financial results from our China-exposed companies show that Chinese consumers have been holding up even as broader economic recovery is delayed. Gaming company Wynn Resorts delivered a strong first quarter in early May, driven by a recovery in the Asian gambling hub of Macao, giving us confidence that robust consumer spending on travel and experiences will continue in the quarters to come. We also added to our WYNN position earlier this month after a new Covid wave hit China, which dragged shares lower. But we saw the pullback as a buying opportunity and upgraded the stock to a 1 rating . Coffee giant Starbucks issued a strong fiscal second quarter last month, driven by positive growth in China for the first time in almost two years. Yet the stock fell 15% since the start of May on concerns about a stalled recovery there. We bought SBUX shares down at the end of May. Prestige beauty brand Estee Lauder reported a more mixed fiscal third quarter at the beginning of May, pressured by a slower recovery in the company's Asia travel retail business, which had too much inventory. That resulted in terrible guidance and a major sell-off in EL shares. At the time, we thought the stock decline was overdone but did recognize it will take a few quarters to work off the excess inventory. We later bought small into that weakness in mid-May. Bottom line Beijing has been taking consistent and steady action to boost economic activity to accelerate its economic rebound. We take that as a positive sign for consumer spending there. At the same time, we acknowledge the ongoing recovery in certain areas of the Chinese economy also means there's uncertainty in the mix, which could mean pressure for some Chinese consumers, especially those in lower-income households. However, based on recent retail sales data coming out of China, there's clearly pent-up consumer demand, signaling to investors like us that there's more upside ahead for companies doing business there. With indications of potential Chinese-government stimulus on the horizon combined with a resilient consumer, we believe it's prudent to hold on to Estee Lauder, Starbucks and Wynn Resorts as ways to play China's post-Covid reopening, which hasn't fully played out yet. China is a growth market for each company and improvement in economic activity there should be a catalyst for these stocks. (Jim Cramer's Charitable Trust is long EL, WYNN, SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A customer holds a 100 Yuan note at a market in Beijing.

Jason Lee | Reuters