With international headlines focused on the brewing conflict between western nations and Russia, China, which has received the bulk of political enmity since the start of the coronavirus pandemic, now sits in unfamiliar territory. Relatively few are talking about the nation since a hot conflict in Ukraine seems well within possibility soon. As a result, Chinese stocks have also been quiet, at least compared to prior months.
Still, the various geopolitical tensions do not necessarily operate within exclusive bubbles. For instance, should Russia invade Ukraine — which again is not out of the realm of possibility — the U.S. will have limited options to respond, all of them arguably being undesirable. However, outright ignoring the Russians and letting them do what they want is out of the question for the U.S. Therefore, what happens in Europe could very well impact Chinese stocks.
Primarily, China has avoided military action to take Taiwan by force given the ambiguous nature of the breakaway nation’s security profile and partnership. As the Taipei Times reported, “global economy depends on Taiwanese firms for 92 percent of leading-edge semiconductor production.” Losing such a critical economic lifeline is unthinkable for the U.S. and its partners. More than likely, they will not allow Chinese stocks such a massive advantage while devastating other markets.
However, the U.S. itself is careful about making too many overt overtures to Taiwan, not wanting to incense China. Therefore, the two sides engage in a cold war, with the U.S. speaking softly and carrying a big stick. But if China realizes that the U.S. stick is actually small and weak, terrified of the Russian stick, that will only send a morale-boosting message to the Chinese and perhaps a profound, generational victory for Chinese stocks.
Interestingly, Russian President Vladimir Putin mentioned that his country has “nowhere to retreat.” The issue that he might not be appreciating is that the U.S. also has nowhere to retreat given that China, not eastern Europe, is at the center of our foreign policy. Weakness to the Russians only creates worse problems in Asia, which means that investors need to watch these Chinese stocks very closely.
For the purposes of this article, I won’t be disclosing ideas to buy or sell. Instead, the focus is on geopolitical flashpoints and how they could impact Chinese stocks. As well, please note that geopolitics is an extremely complicated sector and that anything can happen. Therefore, always approach your investments with comprehensive due diligence.
Chinese Stocks to Watch: Alibaba (BABA)
The Alibaba (BABA) logo featured outside of an office building with bushes in the background
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For years during the pre-pandemic era, many analysts viewed Alibaba as the king of Chinese stocks. They weren’t mistaken. The brand has become a global phenomenon, with its various acquisitions and partnerships accruing exposure to multiple relevant businesses. While it may not have produced the crazy gains that you see in, say, cryptocurrencies, it has been one of the top international blue chips during the 2010s decade.
Even after the spring doldrums of 2020, BABA rebounded, eventually hitting all-time highs later that year. But since late October to early November, it has been a different story for the e-commerce and internet giant. On a year-to-date basis heading into the Christmas weekend, BABA tanked 48%. Indeed, the volatility has been so bad that its lifetime performance — per Google Finance data — is up only 28%.
Up to Halloween 2020, Alibaba shares had posted a lifetime return of roughly 230%. So basically, the decimal point moved one to the left — amazing!
While BABA might appeal to discount-hunting contrarians, global supply chain woes could hurt nearer-term growth initiatives. Further, both U.S. and Chinese regulators (for differing reasons) want Chinese stocks off U.S. exchanges. This sentiment drag could complicate Alibaba for years.
Tencent (TCEHY)
Tencent (TCEHY) sign on Tencent headquarters in Shenzhen, China.
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While Alibaba struggles to maintain a veneer of viability, Tencent has no such problem. Over its lifetime, TCEHY has generated a whopping return of nearly 4,300%. It must be noted, though, that Tencent entered the public arena in late 2008, just as global markets were melting down. Therefore, it has at least partially benefitted from incredibly fortuitous timing, a circumstance that probably can’t be repeated.
Still, that doesn’t mean the backdrop ailing Chinese stocks skipped over Tencent. TCEHY shares were down 17% in 2021, posing some concerns for stakeholders. Although contrarians might be intrigued about the relatively modest discount, they should be aware of the weak technical profile of the equity unit.
For one thing, TCEHY, despite jumping nearly 6% on the last session before Christmas, only saw its price sit just underneath its 50-day moving average. Typically, market participants use the 50 DMA to gauge nearer-term health. Presumably, Tencent shares must break above this line or risk incurring more red ink.
Second, not much technical support exists at its present price point at around $60. The next robust area of support lies between the $40 and $50 area, implying that shares have more to fall.
Chinese Stocks to Watch: JD.com (JD)
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A popular Beijing-headquartered e-commerce platform, JD.com is among the Chinese stocks that have effectively mitigated the fallout from a long-term perspective. Over the trailing 5-year period, JD stock is up 170%, a very respectable figure. But in 2021, shares found themselves down over 20%, with the damage occurring in the past month.
Piling on top of the woes, Tencent recently disclosed that it would reduce its stake in the e-commerce firm and distribute $16.4 billion in JD stock as a dividend to TCEHY shareholders. As you would expect, JD slipped by more than 7% on the disclosure, while TCEHY gained 4%. Following the sale, Tencent’s stake in JD will be a tad over 2%, a dramatic cry from the current 17%.
While JD shareholders won’t want to hear this, Tencent probably made the right move. That’s because technology-centric Chinese stocks have felt the heat from a worrying environment where the underlying nation’s regulators have been cracking the whip.
Navigating JD.com’s future will be especially difficult because, as The Diplomat argues, China’s draconian measures are part of the government’s efforts to modernize socialism and for China to become a tech superpower. Therefore, caution is warranted.
Sinopec (SHI)
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One of the world’s biggest companies and China’s largest energy firm, Sinopec generated $9.4 billion in revenue in 2020. Of course, the ravages of the Covid-19 pandemic put a damper on the top line. In the 3 years between 2017 through 2019, Sinopec averaged revenue of $12.8 billion. But with countries across the globe recovering from the global health crisis, will SHI enjoy a rebound effect?
Due to the wild events that we’ve seen in the trailing 2 years, anything seems possible. At the same time, Sinopec’s semi-annual fiscal disclosures demand further due diligence from prospective buyers. For instance, the six-month period ended June 30, 2021 saw revenue of $4.9 billion, which was up only 16.5% from the year-ago level. That’s not the most encouraging comparison given 2020 was a lost year economically.
Nevertheless, whether you buy Sinopec shares or not, the company is well worth putting on your radar. Thinktanks have long noted China’s expansionary efforts to become not only the world’s biggest economy but its most significant influencer. To achieve this, it will need access to oil and other energy commodities.
Therefore, China could apply more resources on the Middle East, courting favor with key OPEC member states. Interestingly, SHI is up for the year, contrasting sharply with many other Chinese stocks.
Chinese Stocks to Watch: PetroChina (PTR)
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Another one of the major Chinese stocks tied to the energy market, PetroChina provides a counterpoint to the red ink impacting the nation’s tech sector. While multiple internet firms are posting double-digit losses for 2021 based on the tech crackdown, PTR shares are the opposite: they printing double-digit gains in 2021, over 45% YTD to be precise.
If you believe in the global economic narrative — and don’t mind fueling China’s international ambitions literally and figuratively — then PetroChina provides a compelling idea. While the geopolitical winds are not favorable to the country’s tech industry due to the Chinese government seeking greater control and the U.S. leery of its less-than-scrupulous behaviors, the same can’t be said about its energy market.
After all, access to energy is what often separates expansionary countries from static ones. Better yet (for shareholders), PetroChina has been delivering the goods. With $291 billion of revenue generated in the first three quarters of 2021, PTR only needs a relatively modest result in Q4 to exceed not only 2020’s result but also 2019’s tally of $295.7 billion.
Hello Group (MOMO)
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Billed as a “leading player in China’s online social and entertainment space” per its website, Hello Group features ambiguous marketing. But as other analysts have pointed out, Hello Group is really China’s answer to Tinder, the online dating app which apparently (I’m not quite sure because I’ve been out of the loop) popularized the concept of swiping people’s profiles.
Admittedly, I supported the speculative thesis of MOMO stock under the assumption that there are over a billion people in the underlying market. I mean, it’s the biggest addressable market for building human relationships of any kind. Yet investors clearly don’t feel the same way. Shares lost nearly 34% in 2021, making it no different than so many other Chinese stocks.
At this point, I’m probably going to have to avoid talking about MOMO (at least in a positive context) unless a miracle occurs. It appears that shares continue to find new lows. For instance, over the trailing month, the equity unit lost 24%.
However, I’d keep an eye on it as a gauge of whether China’s economic and geopolitical rumblings affect social sentiment.
Chinese Stocks to Watch: Sunac (SCCCF)
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Easily one of the most discussed Chinese stocks is China Evergrande (OTCMKTS:EGRNF), the disgraced and embattled property developer. Now, it can also add the world’s most indebted company of its kind, according to a recent CNN Business report, which states that its liabilities total over $300 billion.
Further, it’s “struggling to repay bondholders, banks, suppliers, and deliver homes to buyers, epitomizing a bloated industry suffering from the Chinese government’s deleveraging campaign.” To be fair, Evergrande disclosed that it made initial progress in resuming construction, but the overture might be too late.
One of the victims could be Sunac, another major Chinese property developer. In 2021, SCCCF shares slipped almost 63% heading into the Christmas weekend. On a trailing 5-year basis, the troubled equity unit is down over 77%.
It’s difficult for me, especially with all the geopolitical turmoil surrounding China, that anybody will trust the Chinese property development market. In other words, Evergrande will likely put a longstanding black eye on the entire underlying industry.
While I’m in no hurry to buy Sunac shares, I’m going to keep it on my radar. Based on the scope of devastation, some political analysts have argued that it could end Chinese President Xi Jinping’s reign.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
