I’ve been following what’s happening in the Chinese stock market and considering how it might impact SWKS’s business.
The Chinese market has posted huge gains since last June. 85% of the shares are held by retail investors (i.e. individual investors). This year tens of millions of new accounts have been opened in China. Many of these people are new, first-time investors. There are reports that many of these people were buying on margin. Clearly, all these new people piling into the stock market has helped to drive up prices. Since the middle of June the Chinese market has plummeted by around 40%. Now these people are in panic and it is continuing. The government is intervening and now more than 45% of the companies have had their trading halted. It is probably safe to assume that millions of people have had their savings wiped out. The carnage might not be over yet.
There are concerns that this large loss in wealth for so many Chinese citizens. There is some concern for stability of the country, but the more common concern is that the decline in wealth for so many people is that future Chinese consumer consumption may be impacted. Imagine if 20 million people had their entire wealth wiped out.
So what might this mean for SWKS. China is currently undergoing a shift from 3G to 4G. People with 3G phones are upgrading to 4G phones. This is a big part of SWKS expected business in 2015. The need for higher and higher data rates is driving this. In China, status and the appearance of wealth is very important which is why the iPhone has been selling so well there. If you look at SWKS stock (and all their competitors) over the past few days, you will notice a sharp decline (a much greater decline than the overall market).
So what will happen? Will millions of Chinese now not upgrade their phones from 3G to 4G? Will they delay their upgrade or first time purchase of a smartphone? My personal opinion is that this 3G to 4G trend cannot be be stopped. People now use their phones so much in their daily activities. It is important to have a phone that can handle high data rates so they can watch videos and run all of the apps that they want to run. The importance of status will not change. Chinese people will want to display that they can afford to buy the best and having an iPhone is a very visible way to do that. Therefore, I think that people who lost their savings will still try to buy the best phone. I think if they lost all their money but still have a job then they will still buy a new phone. I think that new smartphones will be the last thing that people will cut back on. They will cut back on new cars, watches, and other luxury items but I think a smartphone has become a necessity. This is my personal opinion and I have been buying more SWKS over the past few days.
Imagine if 20 million people had their entire wealth wiped out.
The number I read was 90 million. Either way its a <5% of the population and those folks all would have jobs and be able to rebuild wealth gradually.
I agree with Chris that the iPhone is a strong symbol of status/wealth and further enmeshed within our daily culture/lives. I doubt people will forgo the upgrade from 3G to 4G as they would prioritize a new iPhone as its one of the most important purchases made.
The entire stock market crash makes me think of the 1929 stock market crash in the US with individual investors using margin and losing big.
The stockmarket is still just a small part of the Chinese economy. The value of freely floating shares is about 40% of GDP, compared with more than 100% in most rich countries. Stocks account for just 15% of household assets, so their slump should have a limited impact on consumption. The systemic consequences of the margin debt are also limited. The funding has come from brokers, not banks, and equates to less than 1.5% of total bank assets.
Of course, the psychological impact could be worse: people might feel poorer, and therefore defer larger purchases or perhaps opt for less expensive models. But like most things, I’m sure this too will be temporary.
Perhaps this is outside the subject matter of Saul’s board, but I’m wondering how trading halts and easing margin trading policy would help the stock market and retail investors in longer term. This would make the market look better for now, but when the halt is gone, it will hurt more of the ordinary Chinese citizens invested in equity market. I’m worried about long-term consequences of their ‘fire stopping strategy.’
I understand market participants are only small portion of the population, but when you think about wealth inequality in China and echelon that retail investors are in, (i.e. have enough to afford to invest) this may have longer adverse effect in purchasing power of the people affected. Plus investors may not the only ones affected. Public companies, and general market and spending sentiments may be affected against SWKS’ favor.
I somewhat agree that iPhone is an essential part of their ‘appearance game.’ I don’t know if they will continue to upgrade smartphones at this pace in the future if material adverse effects assumed. That’s something very hard to quantify for future SWKS profitability.
I cannot quote stats to support this, but my gut feeling is this is not a small problem. The Chinese economy is slowing down and is probably much worse than the Chinese government would let you know. Friends working in China have been telling tales about empty shopping malls in the most prominent districts in Shanghai for some time now. The main reason the Chinese stock market rose was that the debt burden for most companies and municipal governments (who hold majority shares in a lot of companies) has become so heavy that an inflated stock market can help refinance the debts. This has miserably failed now. The pinch will slowly become apparent.
What this will do to SWKS or should we say, the market in general, should be far more significant than Greece has done. I am being more wary than ever.