: Does the consumer sector need to continue to be pessimistic in 2025?

Tianfeng released a research report stating that the core factor for investing in the consumer sector is valuation, while the core factor for growth investing is industry trends. It is more important to consider valuation and cost performance when investing in the consumer sector. In the current environment where the consumer sector has low valuation, interest rates are falling, and there is policy stimulus leading to a recovery cycle, even if it is weak, all three core conditions are suitable. Therefore, it is not pessimistic to consider consumer spending as a major investment theme in 2025. Key conclusion: Being overly pessimistic about consumer spending based on macro-narratives can be a risk. Using macro and industry data to represent economic trends is effective in growth stock investments based on industry trends. However, investing in consumer stocks using this approach may lead to a "decoupling" phenomenon: where macro and industry economic indicators are average, but the return on equity (ROE) increases. Leading consumer companies have high ROE and low financial volatility, and their brand focus allows for a higher margin of error in operations, naturally leading to valuation premiums. Their buying opportunities often appear in unfavorable macro environments. Being overly pessimistic about consumer spending based on macro-narratives might cause investors to miss out on prime opportunities to invest in leading consumer companies. Taking liquor companies as an example, reviewing their profitability and stock performance after 2016 shows that their profitability is not only detached from aggregate consumer indicators (e.g., growth in resident income and real estate investment representing enterprise spending capacity), but also from specific industry volume indicators (e.g., per capita alcohol consumption). Post-2016, liquor companies' ROE continued to steadily rise, and from 2016 to 2021, the sector achieved both profitability and valuation growth. Why can consumer companies maintain high profitability (ROE) and price increases even when total consumption indicators are declining? First, when macro or industry growth slows down, total demand stagnates, capital expenditures decrease, leading companies' market shares concentrate, improving the competitive landscape and resulting in leading companies' alpha market trends. Second, in mature consumer product sectors, there will be a high investment value reflected in the financials - high ROE and low volatility. When the risk-free interest rate decreases, they will gain a premium for relative stability, and valuation increases even if performance does not rise or only slightly improves. Third, the fundamental logic of consumer products determines that brand management has a high margin of error, cash flow visibility, and another form of valuation premium (long-term extension). In 2018, when most industries undervalue Chinese state-owned enterprises, the valuation levels of food and beverage companies were still higher than private enterprises. International experience suggests that this experience also holds true. Additionally, another major opportunity in China's consumer sector stems from its unique consumption hierarchical structure: market size is large enough, life is more deeply rooted in both first and second-tier cities and third and fourth-tier cities compared to Japan. Every category of consumer across income and age groups is large enough to support consumption. Coupled with the developed self-media new economic model, there will always be areas experiencing sustained high growth in new consumption hotspots like IP economy, snow tourism, and pet products, mainly interpreted through thematic rallies (similar to the consumer theme rally after November 24). Industry allocation advice: Seize the second stage of competitive point 2.0, policy driving and thematic rotation. In a market characterized by wide swings and dramatic fluctuations in thematic trends, institutions find it challenging to participate. Before the improvement of fundamentals upon returning from next year's Spring Festival (Chinese Lunar New Year), it is crucial not to buy high or sell low. Policy driving and thematic rotation grasp the fluctuations in innovation and consumer stages, focusing on Hong Kong's internet sector. The market is currently at the second stage of competitive point 2.0, similar to the "barbell strategy" of 2023H1: on one hand, as sentiment shifts and expectations improve, leading to an upward bias in the winds, turnover remains high, leading to active trends and high turnovers in the technology sector; on the other hand, effective policy implementation takes time, and the pace and intensity of policies will depend on the current economic situation, suggesting that the "weak reality" could continue for some time, while monopolistic dividends may occasionally show strength. Continued policy support for the people's livelihood and consumption is also worth looking forward to.