![]() Thus the driver of Chinese equities in the medium term will have to be their own domestic investors. There is already a “China discount” that Western investors apply to all Chinese investments, but that discount appears to be steadily getting larger. As a result, significantly harming China will harm America – and so it will have to fight the battle in very specific areas.Ĭapital markets is one of those areas and this may in time lead to a significant separation in finance and investment. That said, policymakers have waited so long that the Chinese economy is now integral to the world and to the US. The US now understands that China is looking to take it on in the great superpower contest at some stage in the next ten to 20 years, and Washington has awoken to the need to hamper China’s charge. However, this highlights a problem with investment in Chinese equities in the medium to long term. JPMorgan recently classified the whole Chinese internet sector as “uninvestable”, which looks like one of the great contrary indicators of all time. Will Alibaba and its peers return to their halcyon days? Probably not, since the government now has them in its headlights, but they should still trade a lot higher. The wall of worry around Chinese tech is tough to break down, but investors will in time fight through to take advantage of depressed valuations. With 40% of its market cap in cash and a free cash-flow yield nearing 10%, this is a deep value stock – but one with earnings set to grow 20% per year for the next three years. Alibaba was once a growth name but now trades on eight times forecast 2022 earnings for its core business. That will be accelerated by the dramatic shift in valuations for these names. ![]() These will turn and the shares will recover. Research from JPMorgan shows that the performance of Chinese tech stocks has tracked short-term earnings expectations. ![]() Those earnings are set to improve in the second half of 2022. Coming on top of the weak macro picture in China, this has led Alibaba to have weak earnings in 2021 and into 2022. Thus Alibaba is now going through an aggressive investment cycle to head off competition across a number of its business areas. For example, Pinduoduo, the leading group-buying website (it offers significant discounts on a wide range of products if sufficient users commit to buy), has taken significant market share from Alibaba in the last three years, whereas in the West no one is significantly challenging Amazon’s dominance. The Chinese internet sector is much more competitive than its Western equivalent – there are many more players in each segment of the market and new companies are arriving all the time. This has been exacerbated by earnings weakness. What has happened is that the government’s action has had a massive impact on investor sentiment on these companies – and thus their equities have seen a marked decline in valuations. That said, it remains difficult to implement these policies and the leading internet companies (bar Ant) have seen little actual effect on their economics from new regulation. The broader regulation has been focused on attempting to limit the monopolistic power of platform businesses such as Alibaba and Tencent. Ant Financial, his key asset that was heading for an initial public offering (IPO) before he made his ill-fated speech, has seen radical forced changes to its business model. Much of the pain has been born by Jack Ma. This was compounded by the very public regulatory attacks on the high-flying internet sector. In the West, “levelling up” policies don’t create panic about a return to the high tax regimes of the 1970s, but when you have the Chinese Communist Party in charge, investors are prone to worry over a roll-back of capitalism. Xi has said that the government will no longer encourage free-wheeling capitalism but would encourage “common prosperity”. That said, the government has started loosening both fiscally and monetarily and with Xi ’s eye firmly on his coronation for another five years at the party congress later this year, we should expect the Chinese economy to recover into the second half of the year.Īgainst this backdrop, the government has chosen to redirect its policies. GDP growth in China in the first half of 2022 is likely to be the slowest in the last 20 years. With the government providing limited support to the economy or consumers, growth slowed and is continuing to slow. However as the West opened up, China stayed closed. The previous year was fine, as the Chinese economy benefited from the sharp recovery in consumer spending in the West. The failed pandemic strategy fed a weak macro picture in China in 2021.
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