Kathy
in Memos & Musings · 5 min read
We just witnessed the China stocks making a record rally this week as Beijing moves to calm markets. We shared on our public telegram group that we have accumulated further positions and made another round of purchases in China stocks on 16th March 2022, before and after the announcement was made.
These are 3 main things we believe are weighing in the minds of investors who are adopting a watch and wait attitude before investing into China and my thoughts on them:
We believe that while China and Russia may in part share some similar geopolitical objectives, their economic interests are vastly different. China is too deeply integrated into the global economy to risk helping Russia. Mr. Xi who is looking to renew his term for a third time, would also have done his cost-benefit analysis and would be aware that any efforts to help Russia will not bode well for him. Earlier this week too, the U.S. and China just met in Rome and the agenda for the U.S. was to remind China what would happen if they aligned with Russia. This is important for the U.S. in order not to undermine the impact of their sanctions and to possibly put the last nail in the coffin to Russia’s “special operations”. China was quick to say that it will not invade Ukraine and gave other indirect affirmations that they will know what not to do. China has refused to send aircraft parts to Russia and along with other low-profiled measures to make life less easy for Russia quietly. Hence we are of the opinion that China’s priorities are to pursue new policies to boost its sputtering economy and would not want any sanctions to affect them.
For the longest time, this piece of news has been used to good effect to scare investors selling China stocks in panic. On 16th March 2022, such delisting worries were put to rest at least for now as Beijing vows to cooperate closely with their U.S. counterparts to ensure compliance. We have shared previously in our private Telegram group chat on Dec 6th 2021 that China has already mentioned they will do so, albeit not in a high profile fashion. So it wasn’t exactly a piece of news that came unexpectedly.
But before this piece of news came in, we were already invested into China as we believe that these companies are going to fix this issue and comply with the necessary regulation eventually. And while it happens, these China companies will still continue to grow.
The current alarming spread in China is likely due to the low efficacy of the Chinese Sinovac vaccine against Omicron. No doubt this would result in some headwinds for China’s near term economic prospects where they are facing the worst outbreak they have ever seen since Wuhan in early 2020. We believe that the current or future lockdowns, the strict containment efforts imposed and the implementation of antiviral pills may eventually bring the spread to a halt just like they did before.
We are of the opinion also that the huge drawdowns were mainly from the first two concerns (possibility of sanctions and the ADR structure) and that the surge in covid cases should be the least concern of all. Investors may try to front-run the market and just attempt to start to buy in before the Covid situation improves as they have already seen that it can be eventually contained. Remember that the markets are forward looking.
No doubt our current positions in China are still negative overall at this juncture (we have been invested since last year’s pullback), but we see this as a long-term play that will be rewarding in the years to come. Based on these reasons and coupled with our Moneyball Investing methodology, we identified that this is an opportune moment to go shopping for China stocks to bring down our average costs.
About Kathy
Co-Founder of The Joyful Investors and Co-CIO of InvestingNote Portfolio. I graduated with a degree in Economics in National University of Singapore (NUS). My previous experience with traders at the Merrill Lynch enable me to realize many counter-intuitive truths about how the financial markets work and to uncover the challenges faced by many new investors. Investing can be astoundingly simple, and my goal is to make financial education accessible and easy to understand for everyone.
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excellent analysis on the current situation that is gripping would-be China investors
well-thought and insightful opinions. personally some of those points came across to me as well which i agreed and personally bought more on friday.
The China bus is leaving....