“Headline risk” keeps coming after Chinese stocks … from both sides.
On Tuesday, shares of Didi Global Inc. (NYSE:DIDI) — the “Uber of China” — got crushed just days after the company’s U.S. initial public offering (IPO). The shares plummeted around 20% after a Chinese regulator ordered the removal of the company’s platform from app stores, citing security risks.
This isn’t the first time Beijing has disrupted a Chinese tech firm’s rise to fame and fortune. Uneasy with the growing influence of big technology firms, Beijing has been cracking down on Chinese tech firms for months.
In April, Chinese regulators fined Alibaba Group Holding Ltd. (NYSE:BABA) a record $2.8 billion after an antitrust probe found it had abused its market dominance. Before that, in November, they delayed a planned IPO of Alibaba fintech spin-off Ant Group.
So, it’s no surprise that exchange-traded funds like Global X MSCI China Information Technology ETF (NYSEARCA:CHIK) have disappointed year-to-date.
Of course, we were beating up on Chinese tech stocks long before Beijing started its clampdown. Recall…
- President Donald Trump’s “tariff war” with China, targeting everything from solar panels to steel, as part of his effort to reduce the U.S. trade deficit.
- The United States and other Western nations accusing Huawei and ZTE of conducting espionage on behalf of the Chinese government and freezing them out of the 5G network gear markets.
- The Dec. 31 presidential order barring U.S. companies and individuals from investing in firms that the administration alleges aid the Chinese military.
- In January, the U.S. Securities and Exchange Commission (SEC) adopting a law that threatens to delist Chinese securities on American stock exchanges that fall afoul of the act’s rules.
- And last month, the U.S. Senate passing bipartisan legislation to counter China’s growing influence by investing more than $200 billion in technology, science, and research.
Beijing’s crackdown on its own tech industry and these developing tensions between China and the West clearly add heaps of risk to the markets.
We could see that Tuesday morning…
Why We Said “Farewell” to China
This “headline risk” is one of the lesser-known risks in the investment world.
Unlike more traditional risks, like a bad quarterly earnings report or an industry slowdown, this risk is not fundamentally connected to a company’s profitability or operational health.
It is simply the risk of a bad headline — a bad story that causes investors to become skittish… even if the story is false.
That’s what makes headline risk so insidious. It doesn’t have to be true, or even close to true. It just has to be a headline.
With each passing day, new headlines cross the wires about rising hostilities between the United States and China… or about Chinese stocks getting the boot from U.S. stock exchanges… or about Jack Ma, China’s richest man and the cofounder of Alibaba, going underground for three months after publicly criticizing China’s state-run banks.
The barrage of bad headlines is creating a stiff headwind for Chinese stocks, while also raising the odds of a “Black Swan” event that would put even more downward pressure on them.
Therefore, back in early August, I recommended a complete exit from all China-based positions in the Speculator and Fry’s Investment Report portfolios.
This recommendation may have seemed extreme or impetuous at the time … but it was neither one.
On a fundamental basis, I continue to like many of the Chinese stocks I once recommended — and continue to expect them to deliver outsized growth over the coming years. But company-specific virtues are no match for bad headlines.
The United States and China are now fighting an economic “cold war.”
That means the federal government is shifting billions of dollars to fight that war.
Seismic capital waves like this — from wartime spending to critical infrastructure improvements — always create new investment trends and big profits for those who pick up on them.
Today let’s take a look at one example…
How to Find Rare (Earth) Profits
The Dec. 31 executive order barring U.S. companies and Americans from investing in firms associated with the Chinese military wasn’t the first of its kind from the Trump administration.
On September 30, 2020, the former president signed an executive order seeking to end America’s over-reliance on China for rare-earth elements.
These elements are a group of 17 metals that, while not exactly rare, can be difficult to extract in commercial quantities.
They contain unique magnetic, heat-resistant, and phosphorescent properties that make them critical to the technology and defense industries. They are key components of missile guidance systems, lasers, electronic displays, radar, and satellites.
That’s what makes them highly strategic resources.
Yet… the United States has to buy 90% of its rare-earth metals from China!
In other words, China could easily cripple major parts of the U.S. military, simply by refusing to ship rare earth metals to us.
According to the U.S. Geological Survey, China produced 38% of the world’s rare-earth elements in 1993, and 33% of the supply came from the United States. Smaller percentages came from Australia, Malaysia, Canada and India.
However, by 2008, China accounted for more than 90% of global rare-earth element production. And by 2011, China accounted for 97% of global production. Just look at this chart:
Simply put, this reliance on China is a gaping hole in our national security.
Because our politicians are finally coming to this realization, they are scrambling to shore it up… with billions of dollars.
Last September, two congressmen from Texas introduced the bipartisan RARE Act — Reclaiming American Rare Earths Act — to create a comprehensive tax incentive program to encourage investment in U.S.-based rare-earth and critical mineral production.
Beyond this, according to Defense News, the Pentagon has “proposed legislation that aims to end reliance on China for rare earth minerals” by earmarking an estimated “$1.75 billion on rare earth elements in munitions and missiles and $350 million for microelectronics.”
When you follow the investment breadcrumbs, it leads you directly to top-shelf rare-earth mining stocks…
I recently came out with a special report that details a unique rare-earth-metals play.
Plus, several additional recommendations in the report tap into other trends relating to the escalating economic tensions with China.
The effort to shore up this key U.S. vulnerability — and other “stress points” — suggests there are big gains coming.
Find out how to get that report here.
I recently shared an unusual discovery about why the stock market is far less random than you think…
…a discovery that led me to uncover a group of stocks on the verge of a sudden, powerful turnaround. Will this be the success story of 2021?
NOTE: On the date of publication, Eric Fry did not own either directly or indirectly any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls —in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.