Chinese stocks, listed both in Asia – particularly in Hong Kong – as well as in the United States, just keep falling, much to the chagrin of investors and portfolio managers who thought exposure to Chinese stocks was an obvious and critical part of any 21st century portfolio. Now, however, even though big Chinese stocks – especially, tech plays – are trading at record lows, investors around the world are wondering whether it's just batsh@!t crazy to even consider buying the once-heralded BAT stocks, let alone more obscure Chinese penny plays.
Baidu (Nasdaq: BIDU; HKEX: 9888), Alibaba (NYSE: BABA; HKEX: 9988), Tencent (OTC: TCEHY; HKEX: 0700), along with other big Chinese stocks, were considered by investors to be the Chinese equivalents of America's famed FAANG stocks: Facebook (Nasdaq: FB), Amazon (Nasdaq: AMZN), Apple (Nasdaq: AAPL), Netflix (Nasdaq: NFLX), and Alphabet (Nasdaq: GOOG). As companies, these firms may still have more upside as compared to their Western counterparts in the long-term. But are they worth the risk?
Game On or Game Over?
Two analysts weighed in with CNBC this week on the state of Chinese stocks. J.P. Morgan Asset & Wealth Management CEO Mary Erdoes reminded investors that when the U.S. returns are unusually high, Chinese stocks can be purchased at a discount. And indeed, The MSCI China Index is down nearly 20% this year, while the S&P 500 is still up nearly 16% even as the recent sell-off continues. Declaring that "China has gone on sale," Ms. Erdoes seemed to express some incredulity at American investors' deep worries over Chinese markets and companies.
"All of the hand wringing the world has about words coming out of China is the same thing you hear out of U.S. government, so I am not sure why it causes so much consternation," she told CNBC's Delivering Alpha. Erdoes, who serves on the U.S.-China Business Council, compares Beijing's interest in containing or cracking the monopolies of their big tech stocks to the rhetoric and efforts we see out of Washington regarding our tech giants. So, are American investors overreacting to Beijing's moves and/or underreacting to our own? Is the second-largest economy in the world too big and too cheap right now not to invest in?
Or is there something about China under Xi Jinping that has investors rightfully reticent?
Don't Invest in China, Inc.
"China Inc. One country, one company, one CEO." That's how Social Capital founder and CEO Chamath Palihapitiya described the state of the Chinese markets to investors at Delivering Alpha. While firms can generate fees and make money off the billions of dollars in foreign capital, the "game is over" as far as he is concerned when it comes to investing in Chinese stocks. China, in his view, needs to be a more "investable place" before investors should sign on the asset management companies with a heavy China exposure willy-nilly. While investors should always keep a close eye on the rising China, as of right now he says he will read about China, but not invest in it.
Speaking as someone who has covered Chinese stocks for some time, I have never been less optimistic on investing in them as I have been this year. I sold nearly all my Chinese stocks last year after jumping on—and then abruptly off— the Didi (NYSE: DIDI) bandwagon.
But now, as indexes in the U.S. appear ready for a decline, I am finally looking East once again. But beware of more volatility, as Xi Jinping's pivot to a more state-controlled old-school Chinese economy takes root. The only way to invest in China now is to do like the Chinese: Have a Five-Year Plan.
Five Chinese Stocks for a Five-Year Plan
1) Alibaba (NYSE: BABA)
At about $143.69 per share as of Wednesday midday, the stock is now where it was in June of 2017. Meanwhile, the company reported a 22% rise in quarterly profit on Aug. 3. Revenue increased 46% to $31.9 billion. Alibaba said it had 1.18 billion annual active customers during the 12 months through June 30, up 45 million from the prior quarter. The company reported active users were up 14 million, to 939 million.
2) Li Auto (Nasdaq: LI; HKEX: 2015)
While still losing money, Li has seen huge sales growth from its one current model, the Li One SUV—a hybrid. Revenue soared 159% to $780.4 million on an easy beat. Q3 revenue guidance also was strong. Long-term I think there is significant upside in this stock and in the Chinese electric vehicle market more generally.
3) China Eastern Airlines (NYSE: CEA; HKEX: 0670)
If you want to invest in China long-term as it regresses into a more state-controlled market maker, why not invest in a company that is 62% owned by the government. China Eastern doesn't have to play the Cayman-Islands-based game as many Chinese stocks do (a structure that investors fear may not last long-term). An unexciting stock with comparatively limited upside, it's a safe bet on a growing China.
4) Weibo (Nasdaq: WB)
Weibo is China's mostly apolitical (thanks to its censoring government overlords) Twitter/ Instagram hybrid. While there is always a chance that users get bored and move on to the next social media app, Weibo has grown revenues from just $656 million in 2016 to nearly $1.8 billion in 2019. Weibo is worth buying and may see a return to its highs faster than these other recommendations.
5) iShares PHLX Semiconductor ETF (Nasdaq: SOXX)
The only thing that is evolving faster than digital transformation is the cold war between China and the U.S. The fight of the century can be played by buying Chinese or U.S. defense stocks, or by betting on the semiconductor industry. SOXX, which seeks to to track the investment results of an index composed of U.S.-listed equities in the semiconductor sector, has doubled since March of last year as the semiconductor war between the U.S. and China simmered and Covid-19 affected manufacturing. The stock may be ready for a pullback, but long-term this is one American ETF that will continue performing and will only benefit from continued Sino-American conflict—a conflict that will last far more than five years.
A Middle Way to Invest in Middle Kingdom
There may be no middle way to play China's volatile—and historically underperforming—stock market. Investing in China will always come with risks. But such a growing economic force cannot be ignored, both on the world stage, or in your portfolio. As Confucius said: "Everything has beauty, but not everyone sees it." Let's hope Chinese stocks, despite the recent hiccups, are no exception.
CapitalWatch has no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only and does not constitute financial, legal, or investment advice.