Dear Copiers, Followers, and Fellow Investors,
Good afternoon,
I hope your week is going well. This week I have outlined the major macroeconomic trends in China and potential opportunities for investors.
It has been a rough year for Chinese companies, with the main obstacle being the Covid restrictions that have been put in place. One major factor in the economic slowdown has been President Xi Jinping’s “zero covid” strategy, which has halted much of China's economic activity. However, China is recently moving to ease lockdown measures which caused stocks to surge Friday and continually rise at the beginning of this week. There is also a loosening of China's tech crackdown which had seen escalating scrutiny on major Chinese tech companies. One such company that suffered from the crackdown was Alibaba (BABA), whose CEO, Jack Ma, temporarily disappeared and stepped down from the CEO position. Social media giant Tencent (0700.HK) saw increasing fines and regulations at the hands of Xi Jinping's policies. There is a two-sided debate, with some feeling China is “shooting themselves in the foot” and others believing that these actions are in line with China’s best interests. Nevertheless, with crackdowns and covid fears easing, there is a great investment opportunity for those bullish on China’s potential for growth in the coming years.
Stephen Bird, CEO of Arbdn, a U.K.-based investment company, believes that China's stock market could grow fourfold by 2050. China also has the fastest-growing middle class in the world, swelling from 40 million to over 700 million between the years 2000 and 2018. The sheer size of the economy gives increased growth prospects for Chinese companies, and with the total investment of the economy in China reaching 41.6 percent of GDP, it puts them far beyond other countries in terms of domestic investment. Investors should be cautious however as China's zero covid policy is likely to stay in place for the rest of the year; therefore, a rapid shift in economic activity is not likely. If future Covid outbreaks occur, it would bring China back to square one despite the current ease in restrictions.
Chinese stocks have been underperforming, making them a riskier investment. The Hang Seng Index (HSI) is down over 27% in the past year, and the CSI 300 (CSI300) is down over 23%. China’s potential for growth, combined with the reality that stocks have seen major losses because of Covid and government regulation, should be very exciting for long-term investors. As U.S. stocks prove to be very expensive, one may consider looking to China as an alternative. Alibaba and NIO, the Chinese versions of the US companies Amazon and Tesla, have cheaper stock prices giving them more growth potential. With China's population totaling 4.35 times that of the U.S., it gives these companies a unique advantage in that they can focus more on domestic markets. Even if Chinese markets slump, there is no denying the growth potential that exists and the loss in value that occurred across the entire market. The barriers that Covid has caused will not last forever, so one must look to the long term to appreciate the value of these stocks. The question is when is the best time to invest in Chinese stocks? It is impossible to know how long Covid will affect the market, but many analysts are still bullish, saying the recent earnings beat in major Chinese stocks was merely due to base effect and cost savings. Weak consumer spending may take over as the main obstacle for Chinese companies. Analyst Manuel Muehl, a Frankfurt-based analyst at DZ Bank, echoes this view saying: “Next quarter will be very challenging when we begin to see the impact of the lockdowns on consumer spending and advertising budgets.”
One additional concern for investors is the tensions that the war in Ukraine has on the Chinese economy. There is much speculation surrounding China’s stance with Russia and the current conflict. Although there is no formal alliance between China and Russia, they have a strong relationship, especially as they are both rivals of the U.S. as well as other western nations. With the delicate situation in Ukraine, China's involvement in the matter could have serious effects on the markets. There is also tension surrounding China's involvement with Taiwan and lingering threats of war. China has for now stayed on the sidelines with what is happening in Ukraine, which has left a lot of speculation as to what the nation will do as the conflict unfolds. Even if economic conditions improve in China, factors like this may dampen growth or cause future volatility.
Overall, I am optimistic about China's future and I believe Chinese stocks are a great opportunity for investors willing to withstand the economic turmoil.
With very best regards,
MJ
Sources:
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