Essential Consumer Goods Stocks That Seem to Rise but Don't

Impact of China's Lockdown and Consumer Spending Contraction

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Essential consumer goods, which briefly attracted attention as inflation-defensive stocks in the reopening environment, are declining again.

According to the Korea Exchange on the 2nd, the KRX Essential Consumer Goods Index fell about 6% from the 2nd to the 31st of last month, showing the largest decline among the KRX indices. During the same period, the KOSPI only fell by 0.34%. The Essential Consumer Goods Index had attracted attention as an inflation-defensive stock even when the KOSPI fell nearly 2.3% in April, causing all sectors to turn blue, rising sharply by 4.5%, but it turned to a downward trend in just over a month. Looking at the one-year trend of the Essential Consumer Goods Index, it has dropped more than 25%, and the current stock price level is similar to that of April 2020, right after the COVID-19 outbreak.

The Essential Consumer Goods Index includes consumer goods that are essential for daily life, such as food, cosmetics, marts, and convenience stores. The recent poor performance of the index reflects concerns about the sluggish cosmetics sector due to China's lockdown and consumption contraction caused by inflation. As China's lockdown prolonged, cosmetics stocks were largely ignored by investors; LG Household & Health Care fell 19% in a month, and Amorepacific (-8%) and AmoreG (-9.35%) also declined. In the large mart sector, Emart (-12%) showed weakness.

In the securities industry, except for the convenience store sector, which has solid demand among essential consumer goods sectors in the second half, marts, cosmetics, and food sectors are expected to have a weak recovery. Large marts benefited from increased shopping demand due to COVID-19, so they are expected to face a negative business environment in the second half. Although the average spending per customer is increasing due to inflation, rising labor costs and payment fees reduce investment attractiveness.

Regarding cosmetics, China's easing of lockdown measures is positive, but expectations for major domestic companies are not high. Looking at the recent performance of Korean brands on Tmall during the March 8th Women's Day, Amorepacific's 'Sulwhasoo' and LG Household & Health Care's 'Whoo' did not even rank within the top 10 in the skincare category. Hyunjin Park, a researcher at Shinhan Financial Investment, explained, "Korean brands are intensifying competition with European and American brands in the luxury market, while in the mid-to-low price market, they are being outpaced by local Chinese brands."

In the food sector, concerns have been raised that if grain prices rise further due to supply chain disruptions, the pricing power of the food and beverage industry may weaken. The high proportion of raw material imports and significant foreign currency debt make the strong dollar trend negative. Sanghoon Jo, a researcher at Shinhan Financial Investment, analyzed, "In the short term, grain prices are likely to remain strong," and added, "Companies with strong brand power that can raise prices for two consecutive years will increase their investment attractiveness."

This content was produced with the assistance of AI translation services.