Why I like Chinese equities right now

Most Markets Aren't Very Appealing Right Now

In today's global economic environment, many markets have lost their previous appeal due to a variety of factors. Geopolitical tensions, such as the ongoing conflicts in Eastern Europe and the Middle East, have created significant instability. Additionally, trade wars and sanctions have disrupted supply chains and economic relations between major trading partners.

Commodity prices are another area of major concern. Fluctuations in oil, natural gas, and agricultural product prices have created uncertainty, making it difficult for investors to predict future market conditions. Furthermore, varying central bank policies across the world add another layer of complexity. While some countries are tightening monetary policies to combat inflation, others are maintaining loose monetary policies to stimulate growth. This divergence creates an unpredictable investment landscape, causing investors to reconsider traditional markets.

Current State of the US

US is Reporting Fraudulent Data

The credibility of US economic data has come under significant scrutiny. There have been allegations that the reported unemployment rates and GDP growth figures do not accurately reflect the underlying economic realities. Critics argue that the true unemployment rate is higher than reported, as many discouraged workers are not counted in the official statistics. Similarly, GDP growth figures may be overstated due to adjustments and redefinitions of economic activities.

Americans are Hurting Financially

The financial well-being of many Americans is deteriorating. The cost of living has increased significantly, driven by rising prices for housing, healthcare, and education. Wage growth, on the other hand, has not kept pace with inflation, resulting in decreased purchasing power for the average American. Additionally, consumer debt levels have reached record highs, with many households relying on credit to cover basic expenses. This financial strain is evident in the increasing number of Americans living paycheck to paycheck and the rising rates of bankruptcy filings.

US Isn't Just Letting Markets Be Markets

The US government's interventionist policies have created market distortions. The unprecedented fiscal stimulus packages, such as the CARES Act and the American Rescue Plan, injected trillions of dollars into the economy. While these measures provided short-term relief, they have also led to inflationary pressures and an artificial boost in asset prices. The Federal Reserve's monetary policies, including near-zero interest rates and quantitative easing, have further distorted market dynamics. These interventions have created an environment where market fundamentals are overshadowed by government actions, raising concerns about long-term sustainability.

Are We in for a Lost Decade?

The structural issues facing the US economy raise the possibility of a 'lost decade,' similar to Japan's experience in the 1990s. The combination of high debt levels, demographic challenges, and economic stagnation could lead to prolonged periods of low growth. The US population is aging, which will increase the burden on social security and healthcare systems. Additionally, productivity growth has been sluggish, limiting potential economic expansion. If these issues are not addressed, the US could face a decade of economic underperformance, characterized by low growth and persistent economic challenges.

Why I Believe Chinese Stocks Are Attractive

Low Price-to-Earnings (PE) Ratios

Chinese stocks are currently trading at relatively low PE ratios compared to their global counterparts. This suggests that these stocks may be undervalued, providing an attractive entry point for investors. The low valuations are partly due to market skepticism and geopolitical concerns, but they also present an opportunity for those willing to take a contrarian stance.

Increasing Money Flow into Chinese Assets

There is a noticeable trend of increasing capital flows into Chinese assets. Foreign investors are recognizing the potential of the Chinese market, driven by its economic resilience and growth prospects. The Chinese government's efforts to open up its financial markets and improve transparency are also attracting more international investors. Additionally, China's economic recovery from the COVID-19 pandemic has been faster and more robust than that of many other countries, further boosting investor confidence.

Source: EPFR. Data as of May 6, 2024

Concerns of Investing in Chinese Assets

Data Might Not Be Fully Accurate

While the Chinese market presents attractive opportunities, there are legitimate concerns about data accuracy. Transparency and reliability of economic data in China have historically been issues. Investors must approach Chinese investments with caution, conducting thorough due diligence and relying on multiple sources of information to validate their investment decisions. The risk of government intervention and regulatory changes also needs to be factored into investment strategies.

The Companies I Own

JD.com (JD)

What JD Is

JD.com is one of China's largest e-commerce companies, known for its vast selection of products and efficient logistics network. The company operates a highly integrated supply chain, which allows it to offer fast delivery times and a high level of customer service. JD.com has also expanded into various other sectors, including technology services, logistics, and healthcare.

JD Financials

JD.com's financial performance has been robust, with consistent revenue growth driven by its expanding market share and diverse business operations. The company reported revenues of $114.3 billion in 2022, representing a year-over-year growth of 27%. Its net income has also been on an upward trajectory, highlighting its operational efficiency and cost management.

JD Growth

JD.com's growth strategy focuses on expanding its logistics capabilities, enhancing its technology infrastructure, and increasing its product offerings. The company is investing heavily in AI and automation to improve operational efficiency and customer experience. Additionally, JD.com is expanding its presence in lower-tier cities and rural areas, tapping into the vast potential of these underserved markets.

SWOT Analysis

• Strengths: Robust logistics network, strong brand recognition, technological innovation.

• Weaknesses: High competition, regulatory risks.

• Opportunities: Expansion into rural areas, growth in AI and automation.

• Threats: Regulatory scrutiny, economic downturn.

Alibaba (BABA)

What BABA Is

Alibaba Group is a multinational conglomerate specializing in e-commerce, retail, internet, and technology. It operates a diverse range of businesses, including online and mobile commerce, cloud computing, digital media, and entertainment. Alibaba is also a leader in innovation, continuously expanding its technological capabilities and exploring new business opportunities.

BABA Financials

Alibaba has demonstrated strong financial performance, with significant revenue growth driven by its diverse business operations. In 2022, the company reported revenues of $109.5 billion, a 41% increase year-over-year. Its net income has also shown consistent growth, reflecting its strong market position and operational efficiency.

BABA Growth

Alibaba's growth strategy focuses on expanding its global presence, enhancing its technological capabilities, and diversifying its revenue streams. The company is investing heavily in cloud computing, digital media, and entertainment to drive future growth. Additionally, Alibaba is expanding its reach into international markets, leveraging its technological expertise and market knowledge to capture new opportunities.

SWOT Analysis

• Strengths: Diverse revenue streams, strong market position, innovation.

• Weaknesses: Regulatory risks, competitive pressure.

• Opportunities: Cloud computing, international expansion.

• Threats: Political tensions, economic volatility.

MSCI China ETF (MCHI)

What MCHI Is

The MSCI China ETF (MCHI) provides exposure to a broad range of Chinese equities, offering diversification across various sectors. It tracks the performance of the MSCI China Index, which includes large and mid-cap stocks representing approximately 85% of the free float-adjusted market capitalization in China.

MCHI Breakdown

MCHI includes top Chinese companies across various industries, such as technology, financials, consumer discretionary, and healthcare. This diversified exposure helps mitigate individual stock risks and provides a balanced investment approach to the Chinese market.

MCHI Thesis

Investing in MCHI allows for balanced exposure to China's growth potential while mitigating individual stock risks. The ETF offers a diversified portfolio of leading Chinese companies, providing investors with a comprehensive view of the Chinese market's performance.

SWOT Analysis

• Strengths: Diversification, exposure to leading companies.

• Weaknesses: Market volatility, regulatory risks.

• Opportunities: Economic growth, sector expansion.

• Threats: Geopolitical tensions, economic slowdown.

KraneShares CSI China Internet ETF (KWEB)

What KWEB Is

The KraneShares CSI China Internet ETF (KWEB) focuses on Chinese internet companies, offering targeted exposure to the technology and internet sectors. It tracks the performance of the CSI Overseas China Internet Index, which includes companies listed outside mainland China that operate in the internet and internet-related sectors.

KWEB Breakdown

KWEB includes major players in the Chinese internet space, such as Tencent, Alibaba, Baidu, and JD.com. This concentrated exposure provides investors with direct access to the high-growth potential of China's internet economy.

KWEB Thesis

The rapid growth of China's internet economy presents significant opportunities, making KWEB an attractive investment for those seeking exposure to this dynamic sector. The ETF provides a focused investment approach to the Chinese internet market, capitalizing on the growth of e-commerce, online advertising, cloud computing, and digital entertainment.

SWOT Analysis

• Strengths: High growth potential, leading technology companies.

• Weaknesses: High volatility, sector-specific risks.

• Opportunities: Internet penetration, technological advancements.

• Threats: Regulatory changes, market competition.

Conclusion

While the global economic landscape is fraught with challenges, Chinese equities present a compelling opportunity for investors. With attractive valuations, increasing capital inflows, and robust growth prospects, Chinese stocks are worth considering for those looking to diversify their portfolios. However, it's crucial to remain mindful of the inherent risks and conduct thorough research before making any investment decisions.