Given the many issues China is facing today economically, the trade war between it and the U.S. may have been one of the last things on investors’ minds. But that quickly changed earlier this month, when the Biden administration defined its policy with regards to trade with the world’s second largest economy.
The key takeaway from the Biden administration’s approach toward China? The similarities between it, and the approach taken by the preceding Trump administration. The administration, through U.S. Trade Representative Katherine Tai, is attempting to hold the rising superpower to the terms of former President Donald Trump’s Phase One trade deal. Trump-era tariffs are also being kept in place.
What does this mean for China stocks, as well as stocks of non-Chinese companies that do extensive business there? It’s tough to tell right now. On Oct. 7, investors reacted positively to news of a planned Biden/Xi virtual summit later this year, taking it to mean that the situation between the two countries was getting better, not worse.
Despite the hopes that a detente is near, it may not be so cut-and-dry. Concerns are still rising that America and China’s icy relationship will get icier. Coupled with other issues, like the China crackdown on its tech industry, this remains a risky area to invest in. Putting it simply, it’s best keep up with the headlines, which could impact the next direction of these seven stocks:
- Alibaba (NYSE:BABA)
- Baidu (NASDAQ:BIDU)
- DiDi Global (NYSE:DIDI)
- JD.com (NASDAQ:JD)
- Nokia (NYSE:NOK)
- Tencent Holdings (OTCMKTS:TCEHY)
- Taiwan Semiconductor (NYSE:TSM)
China Stocks to Watch: Alibaba (BABA)
BABA stock has been one of the names hardest hit by the recent economic turbulence in China. First, the e-commerce and cloud computing giant, basically China’s equivalent to Amazon (NASDAQ:AMZN) has been in the crosshairs of that country’s regulatory crackdown on tech.
Along with this, fears of slowing economic growth in its home market, and of course the debt crisis with Evergrande (OTCMKTS:EGRNF), pressure shares as well. Admittedly, among the many issues surrounding it now, the U.S-China trade war may be the least of Alibaba’s worries.
That is, the possibility of rising trade tensions likely won’t have a big impact on its operating results. Despite this though, it could have further impact in another way. Worsening relations between the two nations may compel investors to price in a greater discount in China stocks overall. It may already be heavily discounted, trading at a forward price-to-earnings, or P/E, ratio of 17.3x. But that doesn’t mean it can’t get cheaper before Wall Street decides it’s too cheap to pass up on.
Nevertheless, there is one investor who’s shrugging off the recent uncertainty: Charlie Munger. The legendary value investor and Warren Buffett associate, through his vehicle Daily Journal (NASDAQ:DJCO), has doubled his stake in BABA stock. Only time will tell whether he’s seizing the opportunity or just diving deeper in a value trap. I wouldn’t buy it just because Munger has bought it. But his contrarian view on shares may be a sign the many fears surrounding the stock, which at around $170.75 per share is down 30.6% year-to-date, may be overblown.
Like with Alibaba, the largest headwind for Baidu isn’t the trade talks, but the other issues currently playing out in China. So far this year, shares in the internet company, which you say is China’s equivalent to Google parent Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), are down around 25%.
Mostly, due to the tech industry crackdown. Yet the trade issues still could play a role in moving BIDU stock higher (or lower) in the coming months. How? If the Biden administration makes progress with its approach, this hard-hit China stock may continue to rebound in price.
If Biden’s moves backfire? Fears could resume rising, pushing China stocks, including Baidu, lower, despite it having little direct exposure to an escalated trade war. Not to mention, the continued risk that the Chinese government’s continued flexing of its power (seen last with news of the country likely rejecting a planned acquisition by this company on antitrust grounds) applying a greater discount to this cheap growth stock.
So, with a lot hanging over it, what’s the best move with BIDU stock? As my InvestorPlace colleague Muslim Farooque recently argued, its low valuation and stellar fundamentals may make it a bet where the risk/return proposition is in your favor at current prices (around $166.75 per share).
China Stocks to Watch: DiDi Global (DIDI)
As you may recall, DIDI stock tumbled not too long after its IPO earlier this year. The reason? Like with scores of other China tech plays, it was an intense regulatory crackdown that caused shares in this ride-hailing play to sink like a stone.
On July 29, after its sharp decline in price, I made the case why it was too soon to “buy the dip” with DiDi Global. First, due to the gloomy prospects of regulators punishing it with what at the time were described as “unprecedented penalties.”
Second, the fact that this stock remained pricey. Even after falling from as much as $18 per share, to high single-digit price levels. Getting back to today, has the situation changed much here? Yes and no. The stock hasn’t moved all that much since its mid-summer cratering. It changes hands today at prices not too far from where it was when I last wrote about it.
But still not yet out of the woods with its regulatory woes, and with rivals looking to take advantage of its current vulnerability? Sticking with China stocks that offer better fundamentals, and upside potential from improved U.S.-China relations may be your better option. Rather than rolling the dice here with this situation.
JD.com, an e-commerce play, is another Chinese stock that’s gotten a boost from Biden’s re-initiation of trade talks. Shares in the company have since Oct. 4 rallied from around $70 per share, to around $80 per share recently.
Investors overall may see this as a great way to bet on the overall economic situation, in China getting better rather than worse. Taking a look at factors, like valuation, however? You may want to reconsider.
JD stock may command a higher valuation (forward P/E of 59.7x), due to its higher rates of projected growth. Between 2021 and 2022, sell-side estimates call for the company to see its revenues growth 22.2%, and its earnings soar by 55.5%. But with news of China’s economic growth, particularly retail sales growth, slowing down? The risk of it falling big on disappointment may outweigh any gains that could be seen if it meets/beats expectations.
On top of this is the risk that the tech crackdown and trade situations, despite the market’s renewed bullishness, could get worse. Put it all together, and chasing JD.com, as it attempts to bounce back, doesn’t seem worthwhile. Investors still bullish on China should instead consider the more heavily discounted names. With this more “priced for perfection” one, it may be best to stay away.
China Stocks to Watch: Nokia (NOK)
After talking about several stocks in China-based companies, let’s look at a Western name that stands to gain (or lose) from Biden’s latest moves on U.S.-China trade. Two factors have helped shares in Finland-based telecom equipment maker Nokia perform well so far this year.
Those would be its status as a meme stock, plus the company’s stronger success at locking down 5G equipment supply deals across the globe. As the meme stock trend keeps losing steam, company-specific factors are going to play a larger role. Either helping to send NOK stock higher. Or, send it back to the $3 to $4 per share it traded for previously (shares were trading around $5.75 per share recently).
So, what does this have to do with China trade talks? In the past two years, America’s more aggressive approach to China has been a boon to Nokia. With the U.S. pressuring its allies to blacklist the company’s Chinese-based rival, Huawei, this company, plus another Western peer, Ericsson (NASDAQ:ERIC) have benefited from less competition. However, this has resulted in both Nokia and Ericsson starting to get shut out of supply deal opportunities in China. With this company looking to the country as a place where it can grow its sales? Renewed tensions may mean this avenue will soon be off the table.
This may hinder its ability to complete its turnaround. In turn, limiting the ability for this stock to add to its recent gains. That’s not to say it isn’t a buy at these levels. But it may not be until it’s clear its other 5G growth strategies will pay off that investors become willing again to pay more for NOK stock.
Tencent Holdings (TCEHY)
One of China’s largest tech conglomerates, Tencent Holdings has been impacted by several of the country’s crackdown measures. For example, as our Larry Ramer wrote back in August, China has gone after the video game industry, of which this company is a big player, with 43% market share.
The company has also felt regulatory pressure with its music unit, as well as its flagship WeChat messaging app unit. Like peers Alibaba and Baidu, this has resulted in TCEHY stock, which in the U.S. trades over-the-counter (OTC), falling from near $100 per share, down to around $63 per share.
Also similar to the situation with China’s other tech giants, shares in this name have been discounted (forward P/E of 20.6x), relative to growth projections. Although, discounting was not to the extent seen with BABA stock and BIDU stock. So, with investors becoming less bearish about this stock and similar plays in recent days, is it time to buy?
Among the plays in this space you can trade in the U.S., the first two names mentioned above may make for better options. Not as oversold as Alibaba and Baidu, it may have more room to fall, if the crackdown continues.
China Stocks to Watch: Taiwan Semiconductor (TSM)
It goes without saying the big role this leading fabricator of semiconductors is playing in the global chip shortage saga. But despite strong growth, from demand outstripping supply, this hasn’t translated into blockbuster performance for TSM stock.
Instead, Taiwan Semiconductor this year has mostly traded around $120 per share. In recent weeks, it’s pulled back to around $110 per share. Worse yet, said pullback may be at risk of carrying on. Why? Due to the risk that tensions between the U.S. and China heat up rather than ease.
If the conflict heats up further between the two nations, this Taiwan-based company could find itself caught in the middle. Consider that China’s status as a world power is growing, and the U.S. is more actively trying to keep this rising power in check. Besides fears of China flexing its regulatory muscle, it may be looking to flex its military muscle as well.
In other words, the risk that China attempts to invade Taiwan, while still seen by U.S. military leaders as a remote possibility, could be on the rise.
As a Seeking Alpha commentator recently made the case, this risk may not be fully reflected in TSM stock’s current valuation. This, plus its rich valuation (forward P/E of 29.5x) may mean it’s best to avoid this name right now.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.