- It goes without saying that Chinese stocks may be the hardest hit due to the government’s strict Covid-19 policy
- Alibaba (BABA): The Chinese flagship company’s efforts to help Shanghai are meeting challenges, boding poorly for BABA
- Baidu (BIDU): Though Baidu’s new ventures are interesting, quarterly sales growth is decelerating
- Hello Group (MOMO): While Hello’s online networking platform should perform well in China, MOMO is dying
After two years of mandates and mitigation protocols, arguably most Americans are simply done with the coronavirus pandemic. But halfway across the globe, the majority of residents of Shanghai, China are suffering a severe lockdown as the government institutes a zero-Covid-19 policy. As you might imagine, the draconian restrictions are brutally weighing down several Chinese stocks.
For one thing, Shanghai is a vital economic hub, representing more than 3.5% of China’s GDP. Therefore, the lockdown — which has gone on for weeks will almost surely negatively impact the nation’s economy. That has got to be a slap in the face for policymakers, who are already navigating commercial property crisis in the shape of the debt-laden China Evergrande (OTCMKTS:EGRNF). Thus, the backdrop for Chinese stocks is incredibly poor.
Second, Shanghai’s lockdown will likely reverberate across the global economy. With China playing a pivotal role in the broader supply chain narrative, several businesses are already raising alarm. In short, if we have another repeat of the supply disruptions, the international community simply lacks the monetary tools to dig itself out of recessionary fears, what with soaring inflation and all. It goes without saying that Chinese stocks may be the hardest hit.
Finally, it’s rather odd that China would take such a drastic, economy-destroying measure to control their Covid-19 outbreak; unless, that is, the crisis is truly serious.
Either way, Chinese stocks look incredibly suspect.
Chinese Stocks: Alibaba (BABA)
As China’s flagship corporation, whatever happens to the world’s second-largest economy is bound to affect Alibaba (NYSE:BABA). Sure enough, BABA has not been exempt from the volatility affecting many other Chinese stocks, with the security down 25% on year-to-date basis through the April 22 session. Unfortunately, this might not be the end of the troubles for the technology and e-commerce giant.
Recently, Reuters reported that Alibaba’s supermarket chain Freshippo was adding more couriers to meet high demand in Shanghai. With most of the city’s residents under lockdown, they’re turning to online transactions to procure food and other essential goods. However, the demand ramp-up increased two or three times pre-outbreak levels, straining supply chain flows.
But assuming that the outbreak eventually fades and the Chinese government starts relaxing restrictions, it’s possible demand could plummet. That puts Alibaba in a precious situation where they must maintain discipline, a microcosm of the problems facing the world economy in the months ahead.
A little more than a year ago, shares of internet services and technology firm Baidu (NASDAQ:BIDU) were on a tear, eventually reaching a price of around $340 in the second half of February. But that was the peak. Since then, BIDU has suffered like many other Chinese stocks as the world comes to grips with a radical paradigm shift. At time of writing, BIDU is down 21% YTD.
On paper, it perhaps doesn’t deserve the steep losses. Recently, JiDU — an automobile startup founded by Baidu and Geely Automobile (OTCMKTS:GELYF) — released its first robot car concept which utilizes a dual lidar autonomous driving system. Although this development proves Baidu has serious innovative chops, investors may be more concerned about nearer-term challenges.
Over the past few quarters, Baidu has been posting declining revenue growth on a year-over-year basis. This dynamic suggests that management needs to start focusing on immediately relevant matters rather than aspirational concepts that may take years to materialize.
Hello Group (MOMO)
Out of the Chinese stocks that are hurting right now, Hello Group (NASDAQ:MOMO) is personally bothersome. That’s because I previously lauded the company. Well, maybe lauded is too strong a word. Nevertheless, I liked the concept of Hello Group, which is a social network and entertainment platform that’s tied to the most populous country on the planet.
Furthermore, I reasoned as a contrarian that as the world came to grips with Covid-19, demand would increase for MOMO. While we may distinguish each other through artificial means like language and culture, fundamentally, all humans are the same. We have the need to socialize with one another and Hello Group facilitates exactly that.
Unfortunately, the market doesn’t think so and I must say for good reason. Revenue growth in 2021 slipped slightly under parity against 2020’s result while the company posted a net loss of $457 million. Sadly, the writing may be on the wall although I got to admit I still like the concept.
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.