Beleaguered investors looking at the share prices of stricken technology and growth giants like Amazon and Tesla might take heart from what’s going on in China.
Because over there, some of the biggest companies in the world are partying like it’s 1999:
- Technology powerhouse Tencent is up 82% from its late October lows.
- The online retail behemoth Alibaba has risen 67% over the same period.
- Rival retailer-of-everything JD.com is up nearly 80% since mid-October.
- Social media-driven grocery-buying app PinDuoDuo has doubled in eight weeks (and almost tripled since March).
These Chinese names might not be familiar to some Fools. But understand they are no minnows.
Tencent has a $350bn market capitalisation. Alibaba is a £230bn beast.
Not so much a dead cat bounce, then, as a troop of 800-pound gorillas gone trampolining.
We’re all in it together
Time will tell whether this is the beginning of a new bull market in the world’s second largest economy, or just the proverbial fillip for a dead feline (or departed great ape…)
But when you look at what first took the Chinese market down, I believe it’s probable that October was the bottom for China’s deep bear market.
For context, China’s CSI 300 index fell 40% between February 2021 and October 2022. And Hong Kong’s closely allied Hang Seng index fell 55% from its peak in 2018.
I mention both indices because their relative performance gives a hint of something peculiar to China’s slump and rebound, versus the weakness in global markets more generally.
For sure, Covid and China’s zero-tolerance policy crushed the country’s economy.
Covid Zero in particular kept China’s 1.4bn citizens living under the kind of restrictive mandates that Western nations left behind in 2021. Last year saw the slowest economic growth in China for 40 years – barring only the even more Covid-afflicted year of 2020.
It’s true too that China could hardly be immune from the commodity price inflation of 12 months ago – driven first by Covid, and then by Russia’s war in Ukraine.
China is by far the world’s largest consumer of raw commodities like steel, iron ore, and coal. It imports nearly three-quarters of all the crude oil it burns. Pain was guaranteed.
But Chinese politics amplified the rout
Interweaved among these macro-economic factors is a distinctive Chinese political story.
Firstly, from 2018 until Covid kicked off, Hong Kong was aflame with pro-democracy protests.
Most onlookers agree the standoff has ended with victory for China’s communist party, given the new laws it introduced and the crackdown on opponents and the media that followed.
Again, Hong Kong’s market peaked in 2018. Not 2021, like in the rest of the world. I believe this reflects the prior political tumult pulling down Hong Kong-listed shares.
From a Western perspective, the loss of Hong Kong citizens’ special freedoms within the Chinese state is lamentable. But it also dented the confidence of global capital.
China changing the rules in Hong Kong spooked investors who trusted the assurances that China made when Britain transferred over its former colony in 1997. The moves increased the uncertainty of investing in China by reminding everyone of the strong arm of the Chinese state.
To say these concerns were then amplified in 2021 would be a criminal understatement.
Citing the mantra of ‘common prosperity’, Chinese state regulators intervened widely in the tech sector, ranging from crippling the (briefly) $70bn IPO of ride-sharing app DiDi to huge fines against Alibaba and Tencent. China basically gutted its listed education sector for good measure.
US regulators halted any further Chinese IPOs in response, and commentators warned of a ‘decoupling’ that would see China and Western economies pull apart, after 40 years of integration.
None of this was bullish for Chinese shares.
Turnaround story
Okay, so much for the dead cat. What’s caused the bounce?
It’s foolish to be too certain of the short-term whims of the stock market. But I think we can point to a reversal – or at least a shift – in all the causal factors above:
- The world’s other big economies have re-opened. Supply chain disruption has abated and freight costs have collapsed. All great for an export-driven economy like China.
- Bulk commodity prices have receded since their surge of 12-18 months ago, and China is buying a lot of Russian oil cheaply. All great for China as a massive importer of raw commodities.
- After nationwide unrest, Zero Covid was abandoned virtually overnight. While this has caused a tragic upsurge in disease and death, from an economic perspective it’s like pulling the bandaid off. Big cities like Shanghai and Guangdong already seem to be through the worst of it, with consumers returning to restaurants and shops.
- As for politics, October saw President Xi Jinping ratified as leader for life. I’m no apologist for autocracy, but the move must reduce short-term uncertainty as well as the desire of the State to bring emerging rivals – such as tech leaders – to heel. Similarly, the Hong Kong national security law introduced in 2020 has potentially (and unfortunately) ended to their protest movement.
The Motley Fool is an investing website, and while the heavy involvement of China’s politicians in the country’s capitalism makes politics almost uniquely important when evaluating Chinese investment, I’ll leave others to ponder the long-term consequences of these developments.
From an investing perspective, though, it adds up to an about-face going into 2023.
After three years on hiatus, the Chinese consumer should come roaring back. That will benefit Western firms from car manufactures like Tesla and Volkswagen to luxury outlets like Burberry.
Chinese tourists will become a massive force again, too.
Meanwhile, supply chains – and potentially the cost of imports for Western consumers – should ease still further as China’s factories return to full strength. It will be bumpy as Covid rips through the country. But most workers are young, and I’d expect the sector to be humming soon.
How this nets out for Western stock markets remains to be seen – especially in the short term.
Consider inflation. Yes, a full reopening of China should see its output having a deflationary impact on its manufactured exports. However, it will also increase domestic demand – especially for energy – which will be inflationary.
For investors prepared to put money into China-listed firms, though, it’s hard to see these developments as anything but positive.
And that is already being reflected in the share price of UK investment trusts exposed to China.
Fidelity China Special Situations is up 50% since the end of October. Even the more diversified Templeton Emerging Markets trust has bounced 15%, with a 27% weighting to the region.
Today’s pain is tomorrow’s gain
I began saying we might look to China’s market rebound for inspiration after a bruising 2022.
However, I don’t want to imply that recent developments in the Middle Kingdom are guaranteed to translate into an immediate rally in London and New York.
China’s biggest companies fell much further in its crash.
For example, despite its 82% gain in recent weeks, Tencent is still at half its 2021 peak, when its market cap approached $1trn.
Also, there were those political issues that amplified the woes of Chinese stocks. Time will tell if the relief is temporary, but anyway, they don’t translate directly to Western company valuations.
On the other hand, a stronger Chinese economy should be stimulative for global animal spirts. And any softening in China’s political tack wouldn’t go amiss either.
Perhaps the biggest takeaway is simply a reminder that things can get better.
It’s easy to forget when you’re mired in a bear market. The news is invariably bleak, and the future seems worse: recession, falling profits, geopolitical turmoil.
But it’s only then that the market turns – when all the bad news is finally in the price.
It always looks ugly at the bottom. Just ask anyone who sold Chinese stocks in October 2022. But also learn a lesson from the spectacular recent gains enjoyed by those who held on!
