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

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Bank of America Merrill Lynch clearly stated in its latest report that it is optimistic about China’s consumer stocks sector, with its core support based on three key changes: low base effect opening a window for recovery, valuations dropping to historical lows, and asset attributes showing “convertible bond–like” characteristics.

According to Wind Chaser Trading Desk, the report points out that China’s consumer sector is undergoing a structural shift in investment logic. The current market shows three key features: First, the low base effect is beginning to appear, with sales in several sub-industries (such as liquor and dairy products) falling back to levels of several years ago, providing a foundation for year-on-year recovery in 2026 performance; second, valuations have returned to historic lows, sector valuation premiums have almost disappeared, active fund allocation is at a freezing point, and room for contrarian positioning is emerging; third, asset attributes are turning towards “convertible bond–like”, leading companies have strong cash flow, high dividend and buyback policies create a price floor, combining defensiveness with elasticity for future valuation recovery.

The sector is shifting from growth-driven in the past towards deep value and defensive allocation. Investors don’t need to bet on short-term reversals and can use low valuations and high dividends to build a safety cushion.

Reason 1: Low Base Effect Emerging

The report points out that 2026 will see a significant year-on-year low base window in several consumer sub-sectors. The liquor industry has already established a very low market comparison benchmark; in the dairy sector, sales of liquid milk by China’s two largest companies have fallen back to 2019 levels after two years of deep adjustment.

The bank believes that, based on the current generally low base levels, many sub-sectors are likely to achieve “second derivative improvement” in 2026, and might even turn positive in year-on-year growth. Such a structurally low base effect provides important performance buffering and recovery support for consumer companies.

Reason 2: Sector Valuations Returning to Historical Lows

Bank of America data shows that since the end of 2023, the MSCI China Index’s forward P/E has risen from 9.3x to 12.4x, while during the same period, the Hong Kong–listed China consumer sector valuation fell from 14.2x to 12.7x. This change has brought the consumer sector’s average valuation premium relative to the MSCI China Index, which has lasted nearly a decade (about 92%), to near zero.

Currently, the consumer sector’s 12.7x forward P/E is close to a level two standard deviations below its historical average, entering the deeply undervalued range and starting to attract the attention of some contrarian investors. Bank of America points out that inquiries about Chinese consumer stocks have significantly increased in recent customer conversations, reflecting the market’s gradually rising focus on this sector.

Notably, active funds' allocation to the consumer sector is at historical lows. In 2025, consumer staples and discretionary consumption have become the lowest relative allocations by active funds, providing ample room for potential future capital inflow. Against the backdrop of continued market rises and unclear prospects for hot trends like AI, some investors may re-examine their portfolios and increase allocation to the undervalued sector.

Reason 3: "Convertible Bond–Like" Features Provide Defensiveness

The report emphasizes that most leading consumer companies still maintain strong net cash positions and cash flow generation capability. Many companies have significantly raised dividend payout ratios, with some even setting clear minimum dividend amounts, enhancing predictability for investors in terms of dividends. Meanwhile, stock buybacks are also quite common in the sector.

Based on these measures, many consumer stocks now offer dividend yields around 4%-6%, and if buyback returns are included, total shareholder yields are even more attractive, providing effective downside buffering for stock prices.

The bank further analyzes that this kind of asset, which combines stable cash flows and attractive dividends, has seen its “fixed-income–like” appeal improve significantly. These stocks with “convertible bond–like” features—that is, with downside dividend protection and upside room for profit and valuation recovery—are providing investors with a structurally balanced option between return and risk.

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The above highlights are from Wind Chaser Trading Desk.

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