Bank of America is optimistic about Chinese consumer stocks for three main reasons: low base, deep undervaluation, and "convertible bond-like" defense

Bank of America Merrill Lynch clearly expressed optimism about the Chinese consumer stock sector in its latest report, with core support based on three key changes: the low base effect opening a repair window, valuations dropping to historical lows, and asset characteristics presenting "convertible bond-like" features. According to the Wind Trading Desk, the report points out that the Chinese consumer sector is undergoing a structural shift in investment logic. The current market exhibits three key characteristics: First, the low base effect is beginning to show, with sales in several sub-sectors (such as liquor and dairy products) having fallen back to levels seen several years ago, providing a foundation for year-on-year performance recovery in 2026; Second, valuations have returned to historically extreme lows, with the sector's valuation premium nearly disappearing, and active fund allocations at a freezing point, revealing space for contrarian positioning; Third, asset characteristics are shifting towards "convertible bond-like", with leading companies having robust cash flows, high dividends, and buyback policies forming a price defense line, combining defensiveness with future valuation recovery elasticity. The sector has shifted from growth-driven to deep value and defensive allocation. Investors do not need to gamble on short-term reversals and can build a safety cushion through low valuations and high dividends. Reason One: Initial Signs of Low Base Effect The report indicates that in 2026, several consumer sub-sectors will welcome a significant decline in year-on-year comparison bases. The liquor industry has formed an extremely low market comparison benchmark; in the dairy sector, the sales of liquid milk from the top two domestic companies have returned to 2019 levels after two years of deep adjustment. The bank believes that based on the currently generally low comparison bases, many sub-sectors are expected to achieve "second derivative improvement" in 2026, even turning positive for year-on-year growth. This structural low base effect provides important performance buffering and repair support for consumer enterprises. Reason Two: Sector Valuations Returning to Historical Lows Bank of America data shows that since the end of 2023, the MSCI China Index valuation has risen from a forward price-to-earnings ratio of 9.3 times to 12.4 times, while during the same period, the valuation of the Chinese consumer sector (Hong Kong stocks) has fallen from 14.2 times to 12.7 times. This change has led to the near-complete disappearance of the consumer sector's long-term average valuation premium (about 92%) relative to the MSCI China Index over the past decade. Currently, the consumer sector's forward price-to-earnings ratio of 12.7 times is approaching an extreme low, two standard deviations below its historical average, entering a deeply undervalued range, and beginning to attract the attention of some contrarian investors. Bank of America noted that there has been a significant increase in client inquiries regarding Chinese consumer stocks, reflecting a gradual rise in market interest in this sector. It is worth noting that the allocation of active funds to the consumer sector is at a historical low. In 2025, consumer staples and discretionary goods have become the industries with the lowest relative benchmark allocation for active funds, providing ample space for potential capital inflows in the future. Against the backdrop of a continuously rising market and the unclear evolution paths of popular sectors such as artificial intelligence, some investors may reassess their portfolio structures and increase allocations to sectors with undervalued valuations. Reason Three: "Convertible Bond-like" Characteristics Provide Defense The report emphasizes that most leading consumer companies still maintain strong net cash positions and cash flow generation capabilities. Many companies have significantly increased their dividend payout ratios, with some setting clear minimum dividend commitments, enhancing predictability for investors in terms of dividends. At the same time, stock buybacks are also relatively common in the sector. Based on the above measures, many consumer stocks currently have dividend yields ranging from 4% to 6%. When including the returns from buybacks, the total shareholder returns are often more attractive, providing effective downside protection for stock prices. The bank further analyzes that assets with both stable cash flows and considerable dividend returns have significantly increased their appeal due to their "quasi-fixed income" attributes. Stocks with "convertible bond-like" characteristics, which have downside protection through dividends and upside potential through earnings and valuation recovery, are providing investors with a structurally balanced choice between returns and risks.