Investors have been on the sidelines for Chinese shares, prompting a kind of mini-crash. What is going to happen with China’s economy, and how will this change global markets?

Investors are losing their taste for Chinese consumer stocks, as the country’s stock market continues to be volatile. The Shanghai Composite Index has fallen by nearly 40% since June of last year.

HONG KONG, China— Shares in Chinese firms that offer basic items like milk, beer, and rice crackers have been a safer option in recent years than new-economy enterprises like internet platforms and electric-car manufacturers.

Surging commodities costs, caused by the crisis in Ukraine, threaten to cut into consumer-product companies’ earnings, while new Covid-19 lockdowns in the world’s second-largest economy have hampered demand for certain items, so far in 2022.

An S&P China consumer-staples index, which includes stocks of companies that produce alcohol, bottled water, dairy products, e-cigarettes and snacks, has tumbled 20% in the year to date, with most of that decline taking place following Russia’s invasion of Ukraine in late February. The sector has underperformed S&P’s broader China index, which has fallen 14% over the same period, and internet giants such as Tencent Holdings Ltd. TCEHY -2.13% and Alibaba Group Holding Ltd.

Chinese technology stocks that are popular among American investors have plummeted as a result of the country’s regulatory assault on the sector. The Wall Street Journal discusses some of the increased dangers investors face when purchasing Didi or Tencent stock. Michelle Inez Simon contributed to this composite photo.

China Resources Beer (Holdings) Co., one of the country’s top brewers, has plummeted 24 percent this year, while bottled-water and beverage behemoth Nongfu Spring Co. has dropped 17 percent. Even Kweichow Moutai Co., which makes the fiery Chinese liquor baijiu, has lost 16 percent of its value.

As individuals stockpile basics during the epidemic, shares of Want Want China Holdings Ltd., a manufacturer of rice crackers and milk-based beverages, have done better. Its stock has risen marginally year to date.

“Many food and beverage firms are being squeezed,” said Min Chen, the Singapore-based director of China at Somerset Capital Management.

Investors are more pessimistic about firms that are unable to pass on greater input prices to their consumers, such as ingredients and packaging materials, he added.

The Russia-Ukraine conflict has produced a huge spike in the price of the plastic substance known as PET, which is related to worldwide oil prices, according to Nongfu Spring, which claimed a 36 percent increase in 2021 profit to the equivalent of $1.1 billion this week.

Consumer staples have provided a reasonably safe shelter for investors in Chinese equities during prior market routs that were driven by significant selloffs in internet-technology and property sectors, according to William Yuen, a Hong Kong-based investment director at Invesco.

However, he continued, products and services associated to socializing and entertainment, like as beer and other alcoholic beverages, have been hurt by China’s new efforts to combat coronavirus epidemics.

The market was further shaken in March by China’s struggle with Omicron, which resulted in lockdowns and manufacturing closures in various locations. This week, a two-phased lockdown in Shanghai began, with public transportation suspended and citizens told to remain within their residential complexes.

Mr. Yuen cited the recent relaxation of controls in the southern industrial center of Shenzhen after a severe lockdown as an example of China’s efficiency in mass testing during lockdowns and the reopening that follows. “As a result, when we do see that recovery, it will very certainly be more quicker and stronger than most people expected,” he added.

In China, consumer categories may be established relatively arbitrarily. A bottle of Moutai may cost hundreds of dollars, giving the beverage giant its name additional discretionary features. Moutai said in early March that its net profit for the first two months of 2022 increased by 20% year on year to $1.6 billion.

Investors-Lose-Taste-for-Chinese-Consumer-Stocks

According to Nongfu Spring, the Russia-Ukraine conflict has resulted in a considerable spike in the price of PET plastic.

Xing Yun / Costfoto/Zuma Press / Xing Yun / Costfoto/Zuma Press / Xing Yun /

Investors should concentrate on firms that provide higher-quality goods, according to Jessica Tea, a senior investment expert for Asia equities at BNP Paribas Asset Management, since that corporate emphasis is likely to help such companies improve their market share.

Last week, China Resources Beer predicted flat beer sales for 2021, but said it plans to expand sales of higher-priced goods, which might help offset rising raw material and packaging costs.

Mr. Chen of Somerset Capital is optimistic about China’s expanding mass consumption. He prefers businesses that provide things that appeal to younger generations and have the ability to boost pricing. “Consumer-facing enterprises still have a large runway to expand,” he remarked.

—This article was co-written by Serena Ng.

Elaine Yu can be reached at [email protected]

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