Forward-looking investments such as emerging markets have always appealed to speculators, although the risks are substantial. Still, Chinese companies, particularly those centered on internet technology like JD.com (NASDAQ:JD), appeared as if they were no-brainers. Thanks to a robust population and economic growth, JD stock generated significant, albeit choppy gains.
And make no mistake: The ride in JD stock so far has been anything but comfortable. Since its first day of trading on May 22, 2014, shares had skyrocketed 56% by late August of that year. But then, the Chinese e-commerce firm that’s second only to titan Alibaba (NYSE:BABA) faltered significantly.
It ended that year up double digits, but barely. Later, JD stock impressed in 2015, but suffered a disappointing result in 2016. For a while, shares appeared doomed to yo-yo in perpetuity.
Then, 2017 happened. That was the year when almost all major Chinese stocks catapulted to the moon. BABA enjoyed a banner performance, as did other names like Baidu (NASDAQ:BIDU) — the Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) of China — and Tencent (OTCMKTS:TCEHY), which owns a stake in JD.com.
But lurking in the corner was President Trump. As a real-estate mogul, he went on a no-holds-barred tirade against any entity that allegedly damaged the American economic machinery. This included our own institutions, such as the Federal Reserve. However, it was difficult to ignore that Trump was particularly animated against Asian countries and China specifically.
Back in late 2015, Trump promised he would declare China a currency manipulator on his first day of office. But when he actually got there, his tone softened on multiple issues (remember the “lock her up” slogan?). As a result, JD stock and its rivals quickly shot up despite the now President’s prior rhetoric.
But now, things are back to square one.
Trump Backs Up His Bark, and Sinks JD stock
President Trump is never soft-spoken. Twitter’s (NYSE:TWTR) management can tell you that. His bluster, though, is usually so over the top that you know it’s meant in jest.
But in the world of foreign policy, every word, even every nuance, is magnified. While Trump may confidently strut his stuff on home turf, the international arena is a different story. This is one of the biggest reasons why Trump’s critics were concerned about his administration.
That said, the President took his maverick approach wherever he went, and it was the well-polished Chinese juggernaut that was taken by surprise. Trump not only backed up his bark, but he made critical steps to secure his advantage.
Primarily, he shocked the world when he met North Korean dictator Kim Jong-un. Despite significant criticism, Trump essentially signaled that the U.S. doesn’t need China to reel in the rogue state; instead, his administration will take care of business.
That rattled the Chinese leadership, and indirectly, investments like JD stock because the shock move took away their leverage. North Korea was the pesky pit bull that only responded well to China. Now, the U.S. laid the initial groundwork to have direct communication with Kim.
This opens up the door for the U.S. to continue applying economic pressure on China, and China has little recourse. Unlike other U.S.-Sino conflicts, China can’t use a belligerent North Korea as a negotiating tool. Moreover, the hermit nation has been relatively quiet, which does China no favors.
Therefore, the two rivals are left fighting mano a mano, which is a battle the Asian powerhouse can’t win. China’s economy depends on its exports, which logically means its labor market depends on exports as well. A weakened Chinese consumer is always negative for JD stock.
JD Stock Will Make a Comeback, But Not Right Now
As I recently argued, China’s massive economic growth over the past several years had unintended consequences. Most critically, their people care less about grandiose, nationalistic sentiments and more about personal wealth accumulation.
In other words, the Chinese are becoming like us, focused on the bottom line. That entails, among other things, bitterly complaining about their leadership when the money tree goes cold. This recent dynamic also takes leverage away from China’s government in effectively countering our tariffs.
Finally, the Chinese themselves are feeling glum about their financial prospects. Last June, China’s consumer confidence index took a sharp dive, hitting levels not seen since September 2017. If their markets are any indication, consumer confidence will fall even further.
Of course, this is a headwind for JD stock, and I would recommend against a contrarian position at this juncture. Bearish actions like what we’re witnessing tend to hit hard and long. Plus, the negative sentiment is justified because geopolitically, U.S.-China relations are reaching fresh lows.
Eventually, the situation will work itself out, and JD stock will become viable again. Unfortunately, that time is not right now.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
