Everyone calm down.
That’s the message from Nomura analysts to investors who are suddenly piling into shares of Mead Johnson Nutrition, which makes infant formula.
These investors most likely want a piece of China after news from the state-owned Xinhua News Agency earlier Thursday that China was abandoning its policy mandating that most families have one child.
Apart from the huge demographic implications, more babies will mean more need for diapers, baby formula, and so on.
Shares of Mead Johnson rose by as much as 3% to the highest levels in over two months. In a client note, Nomura’s David Hayes wrote:
A significant uplift in the share price of China baby food exposed stocks is though, in our view, an overreaction. The market has in the past had a tendency to become overly excited about the implications on the policy relaxation in China, and we have seen a more balanced/better informed adjustment take place over the preceding few days/weeks.
The analysts rate Mead Johnson a “Buy.”
Another company whose shares jumped on Thursday was Synutra International, which makes infant formula. Its shares were up by about 10%.
The analysts went on to note that the policy, first fully implemented in 1980 to combat overpopulation, had been eased a couple of times already.
And because this is a big cultural shift for the population, people are unlikely to suddenly start making babies.
For investors cashing in on companies that could benefit from breast feeding, the analysts noted that China had one of the lowest breast-feeding rates in the world.
They wrote: “We do see some benefit to Mead Johnson and other names in the medium term of the China population development, this in a small way contributing to a global category growth outlook that structurally remains superior to most other processed food categories. However, the reaction of the EU names (and the expected reaction of MJN) on the news flow today looks overly simplistic and we advise caution re chasing the theme.”