You never want to let one session or a short series of recent red ink persuade you to overhaul your long-term strategies, especially regarding a sector as high powered and relevant as China stocks. The world’s second-biggest economy didn’t take that status on a fortuitous whim. Therefore, you don’t want to react to the daily ebb and flow of the global markets.
Nevertheless, sometimes immediacy bias — or the tendency to perceive immediate emotions as more intense than previous ones — can be a useful tool, if only as a broken clock mechanism; that is, being perfectly correct twice in a 24-hour cycle. But with China stocks, it’s not just a single horological tool that may be suspect, but rather some key fundamental factors.
Primarily, the Asian juggernaut’s GDP — the golden goose that keeps on laying Fabergé eggs — has finally started to sputter, making previously bullish investors concerned about an incoming cool down or outright correction. Per a CNBC report, GDP in the third quarter slowed to 4.9%, missing expectations for an expansion to 5.2%. Industrial production was particularly bad, rising to 3.1% against a targeted 4.5%, hurting the backdrop for China stocks.
Moreover, headwinds are myriad. Obviously, the one mountainous challenge that captured global headlines is China Evergrande (OTCMKTS:EGRNF). Despite some allegedly positive news, Evergrande has been teetering on the edge of financial disaster. Moreover, its woes reflect reputational damage to Chinese commercial paper, which bodes poorly for economic stability. As well, it ramps up risk for those holding large positions in China stocks.
Moreover, it’s possible that GDP growth could slow again in Q4. A combination of undesirable elements, including the still ongoing novel coronavirus pandemic and supply chain disruptions may impose huge drags on the economy. Therefore, you should at least consider trimming these China stocks.
- Alibaba (NYSE:BABA)
- Trip.com (NASDAQ:TCOM)
- RLX Technology (NYSE:RLX)
- SOS (NYSE:SOS)
- Yum China (NYSE:YUMC)
- Sunac China (OTCMKTS:SCCCF)
- Vipshop (NYSE:VIPS)
To be 100% clear, I’m not advocating for a full dumping of China stocks, nor do I think it’s wise to short them. For instance, an HSBC analyst stated that he sees opportunity in the red ink. While that could be possible, it’s also important to recognize that shares of the Asian giant have jumped significantly over the years. Thus, we could see a longer-than-usual correction.
China Stocks to Trim: Alibaba (BABA)
As the flagship of all China stocks, Alibaba is an easy one to put on this list. For one thing, its technical performance hasn’t provided any reason for confidence outside of reactionary contrarians who automatically buy into red ink. On a year-to-date (YTD) basis, BABA stock has shed more than 28% of market value. Against the trailing year, it’s down almost 46%.
Obviously, much of the negativity is associated with Beijing’s crackdown on technology-centric China stocks. Per an August 2021 report by CNBC, the draconian policies have wiped off billions of dollars from the country’s internet behemoths. Furthermore, with co-founder and former executive chairman Jack Ma mouthing off — and suffering the consequences for doing so — most investors haven’t had the warm and fuzzies for BABA stock.
To be fair, Bloomberg reported that some signs hint to the possibility that Beijing will end its crackdown on tech. You should do your due diligence on that, although interpreting communist China’s motives is extremely speculative in and of itself.
Previously known as Ctrip International before its rebranding, Trip.com would probably qualify as one of the better China stocks to acquire if the pandemic never happened. As multiple tourist destinations throughout the world know, the rise in China’s economy also coincided with a soaring of the nation’s tourism industry.
Per data from Statista.com, in 2019, “Chinese tourists spent about 254.6 billion U.S. dollars while traveling abroad.” So powerful a force they became that they represented an important source of income for fiscally hurt locales that probably would not have survived if it were not for China-based travelers. Not surprisingly, countries like Italy (which benefits heavily from Chinese tourism) initiated closer ties with the Asian giant.
Of course, Covid-19 complicates matters, which is why TCOM should be one of the China stocks to trim. For one thing, unfavorable views of the country reached historic highs last year. Furthermore, Chinese tourists spent less money during the nation’s Golden Week holiday.
So, whether domestically or internationally, China’s tourism sector faces serious challenges — presenting a good opportunity to take some profits.
China Stocks to Trim: RLX Technology (RLX)
If you listen to vaping advocates, they will drone on about how vaping is the lesser of two evils when stacked against traditional cigarette smoking. Moreover, many will make anecdotal claims that their health improved from switching to vaping.
I’ll just stick to Johns Hopkins Medicine’s take, which stakes that vaping is less harmful than smoking but that doesn’t necessarily make the practice safe. However, one thing is for sure: Betting on the initial public offering of RLX Technology, a vaporizer company, was in hindsight a terrible move.
Per information from Google Finance, RLX is looking at a YTD loss of 83%, one of the worst China stocks this side of China Evergrande. Check that: RLX was actually worse than Evergrande at the time of this writing.
Again, regulation is a significant contributing headwind. Just like in the U.S., the Chinese government is concerned about underage vaping and has imposed draconian policies. With the possibility that other countries could follow suit, RLX stock might be a name in which you might want to cut some of your losses, as painful as that may be.
With cryptocurrencies on fire until some hiccupping that occurred on the Oct. 27 session, you’d imagine that — prior to the aforementioned day — SOS, a purported blockchain specialist and crypto-mining firm would perform well. Typically, what happens in this wild market is that a rising tide lifts all boats. How else do you explain the sensational rise of the so-called meme coins?
As a result, I’m sure I’m not the only one who thought about diversifying speculative risk-on funds toward the mining sector. Yes, if you’re a true crypto fan, you ought to be directly tied to the digital assets themselves. But an infrastructure play is also worthwhile. Sometimes, you just need to sell tickets to the game instead of wagering on which side will win.
However, the facade of SOS stock has faded big time, with many analysts questioning its disparate businesses and its financial integrity. But even if those inquiries had satisfactory answers, the crypto sector may have hit an inflection point. Basically, there’s been so much speculation here that something had to give. If so, SOS is probably one of the most ironically named China stocks.
China Stocks to Trim: Yum China (YUMC)
If you were looking at heightening tensions between the U.S. and China strictly at face value, you would come across a curious oddity: Chinese consumers love American fast-food joints, which on paper bodes well for Yum China.
Now, Eater.com forwarded a very reasonable explanation for this. Here in the States, we don’t expect much from our fast food. But in China, the experience is much different. For instance, a Pizza Hut over there may feature delicious pies and a full wine list. As well, American eateries will incorporate ingredients that are delicacies in China.
But in my opinion, the biggest factor is social status — something that Eater.com also covered. If you eat at American restaurants, you are somebody. However, the publication also noted that the rise of Chinese companies has mitigated this effect.
As well, the slowdown in Chinese consumer spending is starting to affect Yum China. While Q3 revenue was up 9% against the year-ago quarter, same-store sales decreased 7% year-over-year (YOY). That could be problematic if consumer sentiment continues to remain sour.
Sunac China (SCCCF)
The Wall Street Journal would like you to know that property developer Sunac China is not Evergrande. However, that might not be the most reassuring message considering that the news agency stated that the company is on shaky ground.
Personally, I love the description that WSJ writer Jacky Wong used. “Property developers that partied the hardest during China’s housing boom are naturally set for a more painful hangover.” We all know what happened to Evergrande, which essentially leveraged up to overpromise but ended up underdelivering and quite badly. While the magnitude of deceit isn’t as bad for Sunac, it’s within the same neighborhood.
Because Sunac wasn’t as irresponsible as Evergrande, Wong argues that it’s not facing immediate liquidity challenges. However, its obligations are piling up and an uncooperative property market could exacerbate the situation.
Largely, though, the issue over SCCCF and other China stocks is that we don’t know what the true story is. Never known for transparency, China has been especially opaque regarding the Covid-19 disaster and continues to obfuscate, making investing in this country riskier than usual.
China Stocks to Trim: Vipshop (VIPS)
I must admit some hesitancy including Vipshop on this list of China stocks to trim. After having lost nearly 59% on a YTD basis, a possibility exists that VIPS could benefit from an extended dead-cat bounce. Moreover, investment opportunities in this part of the world carry substantial weight among meme traders.
You never know when the junkiest equity unit on the block will turn into this year’s must-have trade. Nevertheless, I think Vipshop’s core business model combined with its weakness may be sending us a warning.
According to the company’s website, Vipshop is a “leading online discount retailer for brands in China,” offering “high quality and popular branded products to consumers throughout China at a significant discount from retail prices.” So far, so good. But then, why aren’t shares performing much better, especially since the backdrop of the pandemic is much improved from last year?
In my view, the underperformance of VIPS may reflect the disappointing tourism spending during Golden Week. The negative sentiment might not just be for one holiday season but indicative of a greater problem. If so, you might want to consider cutting some of your losses from this troubled retail play.
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.