Inarguably, one of the current century’s biggest investment narratives has been the rise of China stocks. Once a mess of an economy suffering from an identity crisis, the Asian juggernaut embraced Western-style capitalism — at least in its business dealings. Quickly, the so-called Chinese miracle occurred, catapulting the nation to an economic powerhouse second only to the U.S.
Then, the novel coronavirus happened and soon, many people began reconsidering the broader implications of China stocks. Don’t get me wrong — they’re still very popular, especially with the introduction of new sectors such as electric vehicles. But the ongoing impact of Covid-19 has brought incalculable devastation to the world. And not surprisingly, the Pew Research Center reported that anti-China sentiment throughout the world reached historic highs across the world.
I’m not going to play the blame game regarding the pandemic. For one thing, presidents of prior generations such as John F. Kennedy warned about China’s growing influence. That we didn’t listen and instead fed the beast with American jobs was ultimately our choice. But to be fair, the Chinese government could have clamped down on the pandemic sooner instead of playing media diversion tactics. This move may end up hurting China stocks.
Yes, other granular headwinds exist, such as rising bad debt risks and lower-than-expected economic growth metrics. But my point would be that the country has had these issues before with reasonably positive support from the international community. Now, even those with liberal political ideologies back a tougher stance on the Chinese government, particularly as it relates to human rights issues. Again, I don’t think that’s encouraging for China stocks.
Further, deep down, I believe that individual Americans and citizens of other countries want their governments to send a message to China. The best way that people can do this is to economically boycott the 2022 Winter Olympics in Beijing. With a growing number of American politicians and those from the European Union supporting the spirit of such an initiative, China stocks clearly do not have the same sentiment they earlier enjoyed.
Finally, the biggest risk to China stocks is the potential realization that we the people have the power of the free market to spark positive change. For instance, if you object to China’s treatment of Uyghur communities, then the best thing you can possibly do for them is to sit on your rear by not supporting Chinese flagship events and investments. At a global scale — which Pew data implies — this could be very devastating for China.
Here are seven I think you should avoid for now:
- Alibaba (NYSE:BABA)
- JD.com (NASDAQ:JD)
- Nio (NYSE:NIO)
- Baidu (NASDAQ:BIDU)
- Tencent (OTCMKTS:TCEHY)
- SOS Ltd (NYSE:SOS)
- Ping An Insurance (OTCMKTS:PIAIF)
China Stocks to Avoid: Alibaba (BABA)
As its nation’s flagship enterprise, Alibaba faces serious risks if China stocks lose face with the international investment community for growing concerns about its handling of the Covid-19 crisis along with human rights issues. But BABA stock also is a problematic wager based on China-specific headwinds.
Previously a consistent winner in the fundamentals, Alibaba’s most recent earnings report for the first quarter of 2021 demonstrated typical outperformance in the top line. Revenue of $28.6 billion represented a year-over-year increase of 77%. However, less enticing was net income, which suffered a rare loss of $1.17 billion.
You’d have to go back years to find the last time the e-commerce and technology giant posted a quarterly earnings loss. Unfortunately for BABA stakeholders, the red ink stemmed from China’s antitrust probe. According to The Verge, “China’s market regulator found that Alibaba’s practices had a negative effect on online retail competition and innovation. Alibaba used data and algorithms to strengthen its own position in the marketplace, resulting in an ‘improper competitive advantage.’”
While the issue is hopefully done and over with, investors still have a sour take on BABA stock. Over the trailing six months, shares are down over 20%. It’s probably best to avoid this and other China stocks until we get clarity.
On the surface — but without looking at its technical chart — JD.com wouldn’t strike you as being one of the China stocks to avoid. For one thing, the company enjoys an active user base of just a hair under half a billion people. Usually, it’s a positive when you have more users than the U.S. has residents.
More importantly, the massive user base is translating into tangible financial performances. For Q1 2021, JD.com generated revenue of $131 billion, which was up 39% from the year-ago quarter’s sales tally. On the bottom line, JD took home net income of $556 million, up 227% YOY.
With metrics like that, what could go wrong? Well, something is going wrong when shares are down 24% over the trailing six-month period. Part of it is most certainly due to the Chinese government’s draconian efforts to crack down on anti-competitive actions. As well, China’s economy lost some steam recently, according to a Reuters report.
Specifically, the country’s GDP expanded 7.9% in the April through June quarter, which missed economists’ expectations for 8.1% growth. Given that China’s GDP per capita is only $10,500, an economic slowdown arguably weighs more on consumer-centric China stocks like JD.com.
China Stocks to Avoid: Nio (NIO)
With the dramatic success of Tesla (NASDAQ:TSLA), automakers are finally starting to see the viability of electric vehicles. Legacy manufacturers that have long depended on combustion-based cars are making the pivot to electric-based personal transportation. Sure enough, the Chinese tech sector caught the EV bug as well, with multiple China stocks focused on clean personal mobility.
Arguably, none is more attractive than Nio, at least from an aesthetic point of view. While the company’s electric SUVs have kept the lights on, it’s the Nio EP9 supercar that gave the Chinese brand serious credibility. Before China’s pivot to EVs, the country had a very poor reputation for automotive quality.
Well, maybe we shouldn’t be too quick to praise Nio, as even the much-celebrated EV manufacturer has had its fair share of quality control issues. That’s according to a Bloomberg op-ed from 2019. In January 2020, the Washington Post reported the following about EV-related China stocks:
“Unreliable batteries and other quality problems have also dampened consumer enthusiasm. Nio last year recalled 4,800 car batteries after reports of several fires, worsening the unprofitable company’s already precarious finances. The startup lost $1.2 billion in the first nine months of 2019 and recently warned it could run out of cash this year unless it raises new funding.”
But now, everyone loves Nio, with the company apparently resolving its reliability and safety issues. I’m skeptical, which is why you may want to hold off on NIO stock until you get a better read.
As with other China stocks, Baidu doesn’t look like a natural candidate for investments to avoid (so long as you don’t peek at its price chart). An extremely popular tech firm focused on internet-related services and products — particularly artificial intelligence — BIDU stock has been a crowd favorite among growth investors.
And the company refuses to disappoint, even with the horrible impact of Covid-19. For instance, in Q1 2021, Baidu generated revenue of $4.3 billion, up 25% from the $3.5 billion rung up in the year-ago quarter. Also, the company saw net income spike to $3.9 billion thanks to a $3.6 billion entry in “other income.”
But despite these headline numbers, BIDU stock finds itself down nearly 33% from over the trailing six-month period. According to Financial Express, volatility impacted several tech-based China stocks in recent sessions due to Chinese regulators obstructing their domestic companies from listing in foreign exchanges. “Earlier this month, Beijing announced that home-grown businesses looking to list their shares on foreign soil would require approval from a cybersecurity regulator.”
Also, BIDU faces a double threat as the Securities and Exchange Commission adopted a law designed to scrutinize China stocks and other foreign entities listed on American exchanges. Thus, you may want to wait the regularity circumstances are clarified.
China Stocks to Avoid: Tencent (TCEHY)
As we rang in the new year, Tencent was among the China stocks that enjoyed an auspicious start. From the end of December to Feb. 12, TCEHY stock gained nearly 38%. With the Covid-19 vaccine rollout initiating in many countries along with a gradual decline in new infections, the global economic backdrop appeared bright for the internet-based tech conglomerate.
Further, the financials backed up enthusiasm for Tencent. For 2020, the company rang up top-line sales of $73.9 billion, up 28% from 2019’s tally. As well, momentum carried into the new year, with Q1 2021 revenue of $21 billion, representing almost 25% growth YOY. The bottom line was even more encouraging, with net income of $9 billion greatly outpacing the $3 billion earned in Q1 2020.
So then, why is TCEHY stock down 26% over the trailing six months? Again, you can place a chunk of the blame on growing negative sentiment toward the Chinese government and enterprises, reflecting in unfavorable laws such as the SEC’s Holding Foreign Companies Accountable Act.
Further, the volatility in Tencent shares demonstrates how important access to American capital is to the issuing companies behind China stocks. Whether by government decree or a public-led initiative, Americans alone can send a strong message to China, which has many investors freaked out.
SOS Ltd (SOS)
A blockchain-mining specialist, SOS Ltd has the advantage of strong investor support, particularly from the social media crowd. Sure enough, SOS is one of the China stocks that have performed very well over the last six months, enjoying a profit of 20%.
Just as importantly if not more so, SOS stock generally lies outside of the geopolitical tensions between the U.S., its allies and China. Granted, with China stocks, you can never take politics out of the equation. And as the country trudges along to take the number-one economy crown from the U.S., tensions will further rise. Still, SOS is more related to cryptocurrencies so that’s a positive on the geopolitical front.
But on the flipside, cryptocurrencies have themselves become controversial. About the only thing the U.S. and China can agree on these days is that something needs to be done to prevent digital assets from competing with their respective government-issued currency. So that’s one source of hesitation regarding SOS stock.
The other is the volatility of the underlying asset class. Yes, SOS jumped more than 11% on the July 21 session as the virtual currency sector works to rebuild technical damage. However, if the bears have control of the crypto market — and I think they do — it will be wise to sit out SOS.
China Stocks to Avoid: Ping An Insurance (PIAIF)
With the dramatic increase of China stocks over the years on both American exchanges and over-the-counter markets, we’ve enjoyed unprecedented access to frankly the biggest story regarding emerging markets. This has also helped relatively obscure investments like Ping An Insurance, which up until recently delivered robust gains for speculators.
Now, I made sure to use the term “relatively” because Ping An is a well-known brand in its home market. According to its website, Ping An is one of the largest financial services firms in the world, “with over 200 million retail customers and 574 million Internet users as of June 30, 2019.” Primarily, the company focuses on insurance, banking and investment, along with the fintech and healthtech sectors.
But likely, speculators were really drawn to Ping An’s blockchain enterprise, and why not? When cryptos were smoking hot — roughly between the tail end of December 2020 through early May of this year — anything related to virtual currencies jumped higher. Indeed, PIAIF stock tracked the enthusiasm up until approximately mid-March.
Since then, it’s been a downward slide for Ping An. Unless you have conviction in a recovery for cryptos, I would avoid PIAIF stock.
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.