Yesterday, the A-share market experienced another adjustment, with the Shanghai Composite Index closing down by 0.27%, and the ChiNext Index closing down by 0.76%. Nearly 4,500 individual stocks in the entire market were "waiting to rise," with the average stock price falling by 1.49%, just a step away from the low point before the Spring Festival this year.

It is worth noting that the overall performance of the consumer goods sector was extremely sluggish, with significant declines in sub-sectors such as medical aesthetics, liquor, and daily chemicals. Among them, Aike, known as the "Mao of medical aesthetics," plummeted by 12.31%, the former blue-chip Shanghai Jiahua almost hit the daily limit down, and the once high-performing liquor stock Shede Alcohol Industry fell by 9%. Others such as Hainan Coconut Island, Golden Seed Liquor, Jiugui Liquor, Gujing Gongjiu, and Jinshiyuan also declined, making for a truly bleak scene.

Why did consumer stocks collectively suffer a heavy blow? The direct reason is the successive earnings explosions.

Take Aike as an example. According to the company's disclosed mid-year report for 2024, the first half of the year achieved a revenue of 1.657 billion yuan, a year-on-year increase of 13.53%; it achieved a net profit attributable to the parent company of 1.121 billion yuan, a year-on-year increase of 16.35%. At first glance, it seems not bad, but if we analyze it quarter by quarter, we will find that Aike's revenue and net profit attributable to the parent company in the first quarter grew by 28.24% and 27.38% year-on-year, respectively, while the growth rate in the second quarter dropped significantly to single digits, with only 2.35% and 8.03%, respectively. The significant slowdown in performance inevitably raises market concerns, leading to a sharp decline in stock prices.

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In comparison, the performance of Shanghai Jiahua and Shede Alcohol Industry is even more pessimistic, as both have negative growth in their performance. Among them, Shanghai Jiahua's revenue and net profit attributable to the parent company in the first half of the year decreased by 8.51% and 20.93% year-on-year, respectively, while Shede Alcohol Industry's revenue and net profit attributable to the parent company decreased by 7.28% and 35.73% year-on-year, respectively, indicating the operating pressure on the companies.

For the earnings explosions, each company has different explanations. However, if we analyze from a macro perspective, I believe the root cause is still the weakness in consumer demand.

Data can illustrate the issue. From January to July of this year, the total retail sales of consumer goods in our country grew by 3.5% year-on-year, with the July retail sales growth rate at 2.7%, significantly lower than the overall level of the first seven months. Looking at the sub-sectors, the sales of domestic tobacco and alcohol in our country turned negative year-on-year in July, with a decrease of 0.1%; the retail sales of cosmetics decreased by 6.1% year-on-year; the retail sales of gold and jewelry decreased by 10.4% year-on-year; and the retail sales of clothing, shoes, hats, and textile products decreased by 5.2% year-on-year.

In fact, since the end of last year, the year-on-year growth rate of the total retail sales of consumer goods in our country has been continuously declining. The retail sales growth in the first seven months of this year is only 3.5%, which is a significant gap compared to the 7.3% in the same period of 2023 and the 8.3% in 2019. This not only corroborates the judgment of "insufficient domestic effective demand" made by the Central Political Bureau at the end of July but is also the root cause of the significant decline in performance of many consumer-listed companies.

Poor performance on the consumption side naturally indicates a problem on the income side. In reality, the decline in residents' income is an undeniable fact: in the second quarter of this year, the national per capita disposable income grew by 4.5% year-on-year, significantly lower than the 6.2% in the first quarter; and looking at the types of residents' income, the growth rates of wage income, net property income, and net business income in the second quarter all declined compared to the first quarter. Considering that income is the foundation and premise of consumption, the decline in income will inevitably suppress the growth of consumption.

The reasons for this, in addition to the damage to the balance sheets of residents and enterprises caused by the three years of the pandemic, with the "scar effect" still present and not yet fully repaired, include the following three factors:Firstly, the continuous downturn in the real estate market.

Since the second half of 2021, the downturn in China's real estate market has lasted for three years. For the general public, a house is not just a place to live; it is also a complex intersection of various social, economic, and even political relationships, possessing a range of attributes such as goods, property, and investment. Data shows that nearly 70% of Chinese residents' assets are in the form of physical assets, with real estate holding an absolute dominant position. Therefore, fluctuations in real estate prices can trigger a significant "wealth effect." However, the persistent decline in housing prices in recent years has led to a severe shrinkage of residents' wealth, severely dampening people's confidence in consumption.

At the same time, the real estate industry chain is very long, involving multiple industries such as building materials, construction, home decoration, and finance, accounting for as much as 30% of GDP. The adjustment of the real estate market inevitably has a broad impact on the upstream and downstream of the industry chain, not only severely compressing the profits of related enterprises but also dragging down the national economy, leading to a decrease in residents' income and insufficient consumer confidence.

Secondly, the capital market has suffered a heavy blow.

In recent years, influenced by factors such as the Federal Reserve's interest rate hikes and overseas geopolitical conflicts, the global capital market has generally suffered significant shocks, with many countries experiencing a double whammy of stocks and bonds. Investors' risk appetite has decreased, and their aversion to risk has increased. China has superimposed multiple factors, leading to a lack of market expectations and triggering a major shock in the capital market, with the stock market falling continuously and mutual fund products retracting significantly. This has resulted in a reduction in the wealth of the vast number of ordinary investors, which is reflected in the data as a significant decline in net property income, and consumers naturally tend to save as much as possible.

Thirdly, in-depth regulatory adjustments in some industries.

The most typical example is the financial industry. For a long time, the financial industry has been an industry with high salaries and high returns. However, in the past two years, under the guidance of national policies, the financial industry has been experiencing restrictions and adjustments in all aspects, increasing the cost and competitive pressures of the industry. The salary levels and benefits of practitioners have also declined, and the consumption willingness of this group of people is inevitably suppressed.

From the data, in the first half of this year, the year-on-year growth rate of per capita disposable income for residents in Beijing, Shanghai, and Guangzhou was 4.0%, 4.2%, and 4.0%, respectively, significantly lower than the 5.5%, 6.5%, and 4.8% for the whole year of 2023. This is directly related to the developed financial industry and its high proportion. It is worth mentioning that as an international financial center, Shanghai's total retail sales of consumer goods in the first half of this year grew at a year-on-year rate of -2.3%, which is quite rare. This also confirms to some extent the adverse impact of the contraction of the financial industry on residents' consumption.

It should be pointed out that the recovery of China's foreign trade in the first half of this year has provided strong support for the national economy. However, considering the increasing adverse effects brought by changes in the external environment, as well as the uncertainty of the U.S. election and the EU's electric vehicle tariff arbitration results, China's imports and exports in the next stage are likely to face significant risks. Under the guidance of the Politburo meeting's "unswervingly complete the annual economic and social development goals and tasks," it is imperative to further rely on the stimulation and support of domestic demand, and expanding residents' consumption has become an urgent matter.

In fact, recent policy measures have been strongly supportive. At the end of July, the Central Politburo meeting emphasized the need to "take service consumption as an important means to expand and upgrade consumption." Soon after, the State Council issued the "Opinions on Promoting the High-Quality Development of Service Consumption," proposing to "coordinate the expansion of domestic demand and deepen the supply-side structural reform, expand the opening of the service industry, focus on improving service quality, enriching consumption scenarios, and optimizing the consumption environment. Innovation is used to stimulate the internal momentum of service consumption, cultivate new growth points for service consumption, and provide strong support for high-quality economic development." It also made comprehensive and systematic arrangements for various fields of service consumption.However, it must be emphasized that to truly encourage people to be willing and daring to consume, in addition to measures such as enriching consumer supply, optimizing the consumer environment, and innovating consumer scenarios, what we should do more is to effectively increase residents' income, so that people's "pockets" can truly swell up. At the same time, efforts should be made to quickly reverse people's expectations for the future in all aspects. These are not tasks that can be accomplished overnight, there are still many issues to be resolved, and many things to be implemented.

Speaking of which, can consumer stocks still be bought?

Indeed, many people have deep feelings for consumer stocks, simply because in the history of A-shares, the consumer sector has produced many strong performing stocks, such as Kweichow Moutai, Wuliangye, Haidilao, Gree Electric Appliances, and Pien Tze Huang, all of which belong to this category. Consumer stocks have also always been regarded by the capital market as an investment variety that can go through the bull and bear cycles, and have made many investment masters successful.

But after all, the brilliant performance of consumer stocks in the past cannot be separated from the fundamental support of the long-term steady upward trend of the consumer market at that time. For the moment, the weakness of resident consumption has already had a negative impact on the performance of some listed companies. Combined with the recent period when mid-term reports are being disclosed intensively, it is possible that there will be other consumer stocks with performance explosions. In addition, the turning point for resident consumption to improve has not yet been clearly appeared. In the short term, the probability of the large consumer sector continuing to adjust should be greater than the probability of reversing and rising. Therefore, we suggest that investors can temporarily avoid related stocks to avoid the embarrassing situation of being trapped as soon as they buy.

In the medium and long term, as a pro-cyclical variable of the national economy, the growth of consumption is often positively correlated with the economic recovery. If all aspects of the problems can be properly resolved, once the consumer market shows a clear and sustained positive signal, I believe many consumer stocks will still be the targets that funds are willing to choose - after all, the consumer sector has never lacked high-quality core assets. They generally have steady performance growth, huge brand influence, and will have a very high investment value for a long time in the future. Once the further repair of the national economy is confirmed, and the consumer confidence of the people warms up, then the valuation of these high-quality stocks will also be strongly supported, and it is also a high probability event to start a new round of rising market.

But before that, we may still need to maintain a wait-and-see attitude.