How a Chinese boycott could impact these ASX shares

As trade tensions grow between Australia and China, here are 2 ASX shares that could suffer as a result of a Chinese consumer boycott.

| More on:
a man looks at a stock exchange graph board backgrounded by a Chinese flag

Image source: Getty Images

The Australian government has led the push for an international, independent inquiry into the origins of the COVID-19 pandemic. As a result, the Chinese government has viewed the suggested investigation as a ploy to condemn and humiliate their country. Recently, a Chinese ambassador touted the possibility of economic retaliation in response to such an inquiry, as reported by The Australian Financial Review.

Chinese businesses and consumers have been a reliable source of demand for many Australian goods and services. Australian tertiary education providers, iron ore, infant formula, pharmaceutical, and wine producers are some of the companies that have benefited greatly from Chinese demand.  

Here are 2 ASX shares that could suffer as a result of a Chinese consumer boycott.

A2 Milk Company Ltd (ASX: A2M)

A2 Milk has been one of the few companies that have managed to withstand the chaos unleashed by the COVID-19 pandemic. The a2 Milk share price is actually trading 27% higher for the year as the company’s essential products remained in high demand, especially in China.  

The infant formula company recently posted an impressive trading update which revealed strong revenue growth for its products, especially in China. Currently, a2 Milk estimates that it has a 6.4% share of the lucrative infant formula market in China. As a result, the company has looked to support its sales growth by spending a significant portion of its NZ$200 million marketing budget on ads in China.

Chinese consumers are able to purchase a2 Milk products via premium supermarkets and online through e-commerce platforms. With the company relying heavily on Chinese sales growth to fuel future growth, a Chinese consumer boycott could throw a real spanner in the works.

Treasury Wine Estates Ltd (ASX: TWE)

Australia is the 5th largest exporter of wine in the world, with China accounting for the majority of the volume. This statistic is reflected in the operations of Treasury Wine, with China being the company’s most profitable market.

Treasury Wine relies heavily on demand from the Chinese wine market, generating more than 40% of its total profits from Asia. The company’s prestigious and luxury brands such as Penfolds are highly popular in the Chinese market and offer better profitability margins.

Export figures from Wine Australia recently showed that overall volumes to China were down 14% for the quarter ending 31 March. Management from Treasury Wine has assured shareholders that the company has had positive momentum in Asia, with strong sales across the Chinese New Year festive period.  

Treasury has already downgraded its earnings forecast due to the impact of the coronavirus pandemic. In addition, the company is facing pressure from lower than expected sales in the US market, with the Treasury share price tanking more than 40% for the year.

Foolish takeaway

In my opinion, Australia’s decision to exclude China’s Huawei from the 5G network could have been the starting point of a rift between the 2 countries. The coronavirus pandemic has added to the tensions, which could result in potential trade disputes.

Both Australia and China are reliant on one another and an abrupt end to a trading relationship is probably not on the cards. As we have experienced with trade talks between the US and China, trade tensions do not mean completely cutting ties.

However, with ASX growth shares like a2 Milk and Treasury Wine relying heavily on Chinese demand, I think it would be wise for investors to remain cautious.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News