Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money

71% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

How can Alibaba guarantee continued growth?

There are fears that China’s economic recovery is running out of steam and consumers are being forced to reign in their discretionary spending. While this may result in revenue slowdown in the near-term, Alibaba sees a growth opportunity in its grocery business.

  • Alibaba registered a slowdown in consumer spending in Q2, but sees a growth opportunity in its grocery business.
  • The company is to invest heavily in Taobao as ecommerce competition intensifies.
  • Chinese firms make up just under a quarter of the Global X Ecommerce ETF.

After early signs of a consumer spending rebound following the end of its zero-Covid regime, the latest economic data to come out of China indicate its recovery isn’t going as well as hoped.

Retail sales shot up 18.4% in April, according to official figures from China’s National Bureau of Statistics released last week, up from a 10.6% growth rate in March and 3.5% in February. However, April’s figure was significantly lower than the 21% rise that analysts had been expecting for the month. Industrial output also underperformed.

Following the data release, Nomura analysts cut their forecast for China’s GDP growth from 5.9% to 5.5%, citing “rising evidence that the post-Covid recovery has been rapidly losing steam”. They also cut their second quarter (Q2) forecast from 8.4% to 7.7%.

“We believe sequential growth has already peaked in Q1 and could drop significantly in Q2,” they commented in a roundup on global markets earlier this month.

Consumer inflation fell to a two-year low last month, rising by just 0.1% year-over-year and declining by 0.1% from March’s level. Consumer goods prices fell 0.4% and 0.5% in the respective periods. Low inflation is partly down to a lack of domestic demand for housing and goods, with Chinese citizens remaining cautious when it comes to spending.

Alibaba sees consumer spending slow

Weak demand was reflected in the latest earnings from China’s tech and ecommerce giant Alibaba [BABA].

Domestic retail revenue fell 3% year-over-year in the three months to the end of March, versus a 41% jump in international retail sales. Nonetheless, domestic retail still accounted for 67% of overall revenue, while international retail revenue had a 7% share...

Among other factors, the company blamed “seasonal volatility from an earlier Chinese New Year” for the quarterly performance. Alibaba chairman and CEO Daniel Zhang said on the earnings call that, while a gradual recovery in domestic consumption had been noted, “consumer confidence and spending power still need further momentum”.

“At the same time, competition among the multiple consumption platforms is still fierce, and everyone is trying to capture the incremental,” added Zhang.

One bright spot, however, was the grocery business, Freshippo, which has a number of physical locations, but can also deliver groceries to customers within 30 minutes of an order being placed. The business narrowed its losses for the quarter as it improved its operational efficiency and strengthened its merchandising capabilities.

Grocery business Freshippo set for IPO

Zhang said on the earnings call that rising consumer demand will mean ecommerce and retail companies will have to diversify their offerings and use technology to gain a competitive edge.

Alibaba clearly sees Freshippo as an exciting growth opportunity and is planning to spin it off within the next six to 12 months, as it confirmed in its recent earnings.

The news was first reported last month, and, at the time, Bloomberg Intelligence analysts Catherine Lim and Trini Tan argued that a Hong Kong IPO “raises the odds that the money-losing supermarket unit can become profitable this fiscal year ending March 2024”.

Freshippo announced just last week that it plans to establish eight procurement centres around the world, and has recently signed agreements with 13 international brands, consultancies, global associations and retailers.

“We would love nothing more than to see one of these little Alibabas spinning off from Alibaba [and] becoming another big Alibaba,” said Zhang on the earnings call.

Alibaba’s targeted investment

While there may be headwinds facing near-term ecommerce demand, companies in China are expected to ramp up investments in their services. Alibaba is no exception, targeting its online shopping platform.

The Taobao Tmall Commerce Group announced earlier this month that it’s to spend an unspecified amount on enhancing the user experience of its shopping app. It also plans to capitalise on the latest technological advances and target content creation, in a bid to compete with social media sites.

“Taobao has always been technology-driven,” said the group’s CEO Trudy Dai in remarks reported by Alibaba’s own news site Alizila. “The next step for Taobao is to make AI-powered tools for merchants popular and inclusive.”

It remains to be seen how Alibaba might integrate its cloud service’s ChatGPT-alternative artificial intelligence (AI) language model, Tongyi Qianwen, unveiled in April. One possible application is product recommendation.

Technology will shape user experience

Looking ahead, Alibaba’s ecommerce offerings are going to face increasingly fierce competition from the likes of Douyin (TikTok outside of China), PDD [PDD] and Shein, as well as any new entrants that might burst onto the scene.

As China’s retail ecosystem becomes more digitised and intelligent, ecommerce players will utilise the latest innovations and technologies, including AI, 5G and the Internet of Things, to gain a competitive advantage, attract new customers and drive sales.

“Chinese consumers exhibit strong curiosity and acceptance of new technologies, and are eager to experience the conveniences and innovations they bring, driving the continuous advancement of technology,” argued Deloitte analysts in their 2023 China Consumer Insight and Market Outlook White Paper, published in March.

“Consumers remain enthusiastic about new technologies and look forward to the maturation and application of the metaverse,” they added.

Funds in focus: Global X Ecommerce ETF

Chinese companies make up a little less than a quarter (22.5%) of the Global X Ecommerce ETF [EBIZ]. The fund is weighted heavily in favour of US companies (48%), with the rest in Canada, Singapore, Argentina and Japan, among others. Consumer discretionary is by far the sector with the biggest weighting, at 66.1% as of 30 April. The fund is flat over the past year, but up 6.8% in the past six months.

US companies have an even bigger slice of the Amplify Online Retail ETF [IBUY], making up 71% of the fund’s portfolio. In comparison, China is second with an allocation of 9%. Online retail and online marketplaces have been allocated 49% and 39% of the portfolio respectively, while online travel accounts for 12%, as of 31 March. The fund is down 10.4% in the past year and flat over the past six months.

The ProShares Online Retail ETF [ONLN] is also weighted in favour of US companies: 68.34% versus an allocation of 20.13% for China. Consumer discretionaries make up 78.23% of the portfolio as of 19 May. The fund is down 7.2% in the past year and up 0.8% in the past six months.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Continue reading for FREE

Latest articles