Despite government curbs, top Chinese stocks undergo economic stress, and investors need to exercise care
Challenges for Emerging Market Investors
Last week, I delved into the predicament of emerging market investors who are increasingly distancing themselves from Chinese stocks. One school of thought argues that categorizing Chinese stocks under the broad “emerging market” label doesn’t do justice to the unique market dynamics at play in China. The greater emphasis on Chinese stocks, which make up 30% of the overall emerging market landscape, diminishes the influence of smaller-cap companies in other emerging markets. In essence, it suggests that Chinese stocks deserve a distinct category of their own.
This discourse, however, is aligned with the bullish stance.
On the other hand, a valid counterpoint argues that overexposure to Chinese stocks jeopardizes investor capital in a controlled market where the government intervenes in private companies’ affairs to serve collective Chinese interests, often at the expense of shareholders and stakeholders.
Regulatory Uncertainty and Economic Instability
One analyst’s characterization of the recent exclusion of 66 Chinese stocks from major global indices highlights the concern over negative flows for Chinese stocks. Investors are reducing their exposure to the country, primarily due to weak fundamentals in recent times. Moreover, fears of ongoing financial instability, regulatory uncertainty, and country risk loom large, indicating impending challenges for these stocks.
While certain Chinese stocks appear popular among retail investors, heed this caution: Hold on for dear life—HODL, to use financial lingo—at your own risk.
The Perilous Alibaba Group Holding (BABA)
Diving into the sea of Chinese stocks, Alibaba Group Holding (NYSE:BABA) stands as a case in point for cautious consideration. The looming geopolitical and economic risks aside, the surging presence of direct competitor Pinduoduo (NASDAQ:PDD) is exerting considerable pressure on the e-commerce giant.
Although still smaller than BABA in terms of market capitalization, PDD has significantly outperformed Alibaba, boasting a 60% return over the past six months compared to BABA’s 25% loss over the same period. The most menacing threat looming over BABA, in terms of losing its once-top spot to Pinduoduo, emanates from its pricing strategy and market share. Currently, PDD has the upper hand on both fronts.
However, Alibaba isn’t doing itself any favors either, with a recent miss on earnings estimates. Despite potential short-term stock price surges from buybacks and dividends, the company’s long-term outlook remains hazy. Similar to Amazon (NASDAQ:AMZN), Alibaba is venturing beyond e-commerce, particularly in cloud computing. Nonetheless, this market is becoming saturated, and with less than 10% of the global market, Alibaba’s diversification ambitions pose the risk of further eroding slender margins, ultimately dragging down this Chinese stock.
The Precarious Nio Inc (NIO)
Zooming out for a broader perspective, electric vehicle (EV) manufacturer Nio Inc (NYSE:NIO) grapples with risks as the global EV market experiences a slowdown amid regulatory churn and diminishing overall demand. Similar to BABA, NIO faces intense competition both among Chinese stocks and on the international stage.
For instance, within the Chinese EV market, Nio commands a mere 2% of the total market share, placing it far behind BYD’s (OTCMKTS:BYDDF) 35% and Tesla’s (NASDAQ:TSLA) 8% market shares.
As InvestorPlace’s Louis Navallier recently outlined, even aggressive government stimulus falls short of rescuing this Chinese stock. His assessment highlighted the company’s declining monthly vehicle delivery rate coupled with persistent unprofitability. Such fundamental weaknesses can’t be assuaged by government support and short-selling restrictions. Despite a temporary stock price upswing following these events, a sustained rebound isn’t on the cards. Given that the stock is currently trading at over 1.2x sales and more than 4x book value, it is vastly overvalued by practical standards.
Chinese EV stocks pose a risky proposition overall, given concerns about global expansion, tariffs, and supply chain disruptions related to high-tech components essential for next-gen vehicles. If compelled to choose, follow Charlie Munger’s advice and steer clear of Nio at all costs.
Exciting Developments in the MCHI Investment Fund
Source: Akarat Phasura / Shutterstock.com
Expense Ratio: 0.59%, or $59 annually on a $10,000 investment
The Allure of MCHI Investment Fund
Are Chinese stocks leaving investors feeling like they are grasping at straws? Is there an ETF that can potentially provide shelter from the storm? Look no further than iShares MSCI China ETF (NASDAQ:MCHI). This multifaceted basket of Chinese stocks offers a compelling diverse investment opportunity, with a touch of intrigue thrown in for good measure. As investors grapple with the nuanced risks of Chinese stocks, MCHI presents itself as a beacon of hope amidst a sea of uncertainty.
A Nod to Diversification and Risk-Taking
Embracing tall titans like BABA and PDD, the MCHI ETF brings an added twist to the table with Chinese stocks such as China Construction Bank and the enigmatic Ping Insurance. With over 15% of its holding comprised of financial stocks, MCHI stands tethered to the economic fluctuations that govern the Chinese market. Any upheavals in the financial sector could send ripple effects visible to its per-share price, adding an additional layer of intrigue and complexity for investors to consider.
The Pulse of Market Sentiment
As shorts hold their ground, standing at a slightly elevated level over the past few months, MCHI remains a captivating barometer for investor sentiment. This ETF acts as a guidepost, offering investors a lens through which to observe the evolution of Chinese stocks. Are investors teetering on the brink of uncertainty or standing confidently on solid ground? MCHI could hold the key to unlocking these mysteries.
Bringing It All Together
Jeremy Flint, a seasoned finance writer, takes pride in his adroit understanding and strategic positioning within the financial industry. His adeptness at breaking down complex market concepts, coupled with his passionate exploration of various sectors, has made him a beacon of insight for investors seeking to navigate the intricate labyrinth of the financial markets.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Jeremy Flint, a finance writer with an MBA, excels in content strategy for wealth managers and investment funds. Passionate about simplifying complex market concepts, he focuses on fixed-income investing, alternative investments, economic analysis, and the oil, gas, and utilities sectors. Jeremy’s work can also be found at www.jeremyflint.work.
