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Is The Chinese Consumer A Risky Bet For U.S. Investors And Corporations?

Targeting the Chinese consumer is considered to be a low-risk market bet by many corporations. Wal-Mart (WMT) is one corporation that has been forging into the Chinese marketplace since 1996 and recently showed their continued commitment to investing in China with the announcement of their intent to buy 51% of Yihaodian for an online retail presence. With a population of 1.3 billion people, China is expected to emerge as the largest consumer market in the world by 2020 with half the Chinese population having arrived to middle class status. However, China recently announced a revised growth rate of 7.5% after a seven year stretch of seeing year after year of 8% growth. Couple this with their intention to reduce exports and increase consumer spending, and we are left asking if the market environment has shifted dramatically for U.S. corporations already entrenched in the Chinese economy.

If U.S. companies can successfully navigate through the increased competition coming from within China’s domestic marketplace, the long term upside potential is huge. How can investors navigate the possible risk involved when investing in an emerging market such as China? One way would be to invest in U.S. corporations that are successfully investing in China, while having a strategy to sell during periods of abnormal risk and reinvest when risk conditions have returned to normal.

Many forward thinking multinational corporations have expected the shift away from the export market and towards the Chinese consumer by China’s manufacturers. Invariably, this will lead to increased competition from within China’s domestic borders for U.S. corporations. Wal-Mart has been successful with the Chinese consumer by adhering to their own core mission of saving people money. It obviously resonates well with the older Chinese consumer who is accustomed to saving much of their income and has more recently just started learning to consume. According to recent studies, after being the beneficiary of years of economic reform, the young Chinese have become the consumer with the most spending ability and are becoming the driving force of the Chinese economy. The younger Chinese consumer loves to spend money and tends not to save as much as the previous generation. There is opportunity in all price points within the Chinese marketplace. High prices are often equated with higher quality and many U.S. corporations have successfully raised prices on products sold within China as a marketing strategy targeting the luxury market. Tiffany & Co (TIF) and Coach (COH) are both luxury brands positioned to profit from China’s new, young, rich consumer.

For anyone that has been to China, the visual image of consumerism is often in conflict with many analyst opinions. With China’s rising standard of living, the approaching change in leadership and slowing exports, it’s often difficult for an investor to make the best decision regarding the potential for investing in the Chinese consumer. There are risk assessment tools to help investors manage their portfolio during periods of uncertainty and volatility in an emerging market. One option investors could use is provided by and is a portfolio protection service which provides an investor with risk alerts that identify periods of above normal risk. Another alternative indicator is the SmartStops Risk Barometer IndexTM (SRBI) TM . The SRBI can be used as a predictive indicator as abnormal price movements often precede extended periods of equity and market risks.

For example, if we look at the consumer services sector on the SmartStops Risk Barometer IndexTM (SRBI), the consumer services sector has an SRBI reading of .99 meaning that the current risk ratio for this sector is below the 100 day moving average. An SRBI below 1 infers that the percent of equities in the group experiencing above normal risk is below the 100 day average. A reading above 1 indicates tht the risk is on the rise and the above normal risk percentage is above the 100 day moving average. Note that the consumer services sector risk ratio has been on the decline as the consumer and U.S. economy has begun to recover over these last several months. Now, if we look at the risk chart for Wal-Mart, we see that the first exit trigger in the most recent above normal risk series occurred on 21-Feb-12 at $60.41.

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Although an investor who is invested in Wal-Mart might not want to sell at this point, the fact that the consumer service sector is close to approaching risk above the 100 day average at the same time that WMT is experiencing above normal risk, a stop loss order should be considered to minimize loss.

The Chinese consumer market is not a risky bet for investors that conduct proper due diligence and place well thought out stop loss orders.

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