Tuesday was a big day for Chinese stocks: Hong Kong’s Hang Sang Index reversed a loss to end the day up 0.9%, and China’s CSI 300 Index spiked 19%, ultimately ending the day 1% higher and getting awfully close to a bull market as it shot up from April’s low. China’s Shenzhen-listed stocks also gained 1%.
And this quarter, the CSI 300 has outperformed global indices by the most since 2014. For perspective, year-to-date, the CSI 300 has dropped 10%, while the S&P 500, NASDAQ Composite and Dow Jones Industrial Average have slipped 20.6%, 29.5% and 15.3%, respectively.
The catalyst behind Tuesday’s rally? China announcing that it would ease its Covid-19 restrictions.
The optimism surrounding the lifting of restrictions impacted economies globally. Currencies in Thailand and Australia, countries that look to China for tourism and trade, strengthened after the announcement.
As you may recall, China enforced a zero-Covid-19 policy to lessen the spread of Covid-19. These lockdowns went into effect around the end of March and had a disastrous effect on not only the Chinese economy, but also the global economy.
As a result, stocks suffered as China saw slowdowns in factory production and heightened supply-chain issues. For example, Tesla (NASDAQ:TSLA) was one of the stocks hit hardest by the shutdown in China.
Before restrictions, China had been a source of high electric vehicle (EV) demand for Tesla — its sales spiked 56% in the first quarter of 2022. But in April, sales of Tesla’s Model 3s and Ys tanked 87% from the same month a year prior. For reference, 65,814 cars were sold in March, so the 1,512 sold in April marked a 98% drop in sales, according to the China Passenger Car Association.
Tesla had not seen such low sales in China since April 2020. Delayed shipments and parts shortages also contributed to the low sales volume. I should also add that the Shanghai Gigafactory had previously been Tesla’s top source of production at the end of 2021.
But back to China’s Covid-19 policies… things are looking up. Rather than quarantine for three weeks, people traveling to China will be isolated in a centralized location for seven days followed by another three at home, according to the Chinese National Health Commission’s Tuesday statement.
This is a drastic change from the previous two weeks of quarantine in a centralized location with a subsequent week of quarantine at home. Visitors from Hong Kong will only be required to quarantine for seven days.
“This relaxation [of restrictions] sends the signal that the economy comes first. It is a sign of importance of the economy at this point,” Li Changmin, Managing Director at Snowball Wealth in Guangzhou, told Bloomberg.
All of this comes after analysts everywhere, from Bank of America to Goldman Sachs, spent the last few weeks revising their previously dim outlooks upwards for the Chinese economy.
Now, there were three Chinese stocks that rallied sharply following the Covid-19 restriction news: Nio (NYSE:NIO), JD.com (NASDAQ:JD) and Alibaba (NYSE:BABA).
So, is now the time to jump back into these Chinese stocks? Well, according to my Portfolio Grader, not quite yet…
Nio, Inc. boasts that it is the “next-generation car company,” as it designs and manufactures electric vehicles that utilize the latest technologies in connectivity, autonomous driving and artificial intelligence. In the last month, the stock has rallied 24%. But looking at the longer term, NIO has dropped just over 30% since the beginning of 2022.
And in my Portfolio Grader, the stock does not qualify as one I’d recommend to buy.
As you can see, the stock’s ‘C’ rating makes it a ‘Hold.’ So, I’m not too sold yet on Nio.
JD.com is an e-commerce platform and retailer in China. Like Amazon (NASDAQ:AMZN), JD.com offers same-day and next-day delivery. Like Nio, the stock has given a fantastic performance lately. In the past month it has gained 18%. But, also like Nio, the stock has dropped since the start of 2022: over 2%.
And if you take a peek at its grade, you’ll see the stock earns a ‘D’ fundamental grade — meaning it lacks the strong fundamentals that I look for in the stocks I recommend to buy.
So, for the moment, I view JD.com as a ‘Hold,’ not a ‘Buy.’
Alibaba Group Holding Ltd. is a Chinese online and mobile commerce company, offering solutions primarily for businesses. The company operates through four businesses spanning core commerce, cloud computing, digital media and entertainment, and innovation initiatives. In June, BABA shares rallied 18.4%.
But a quick peek at my Portfolio Grader shows the stock earns a ‘D’ rating.
This makes it a ‘Sell,’ meaning that it lacks the strong fundamentals to make it a good long-term buy. So, while it may have some momentum in the near term, I don’t see the stock outperforming. That’s especially given its D-rating for its Quantitative Grade, which indicates that institutional buying pressure has all but dried up.
Where to Invest Now
These days I’ve been incredibly bullish on the energy sector, and for good reason. According to FactSet, the S&P 500 energy sector’s earnings are anticipated to increase 215.4% year-over-year. And with the second-quarter earnings season just around the bend, I anticipate oil companies to report record earnings, which in turn will drive my Buy List stocks higher in the wake of better-than-expected earnings.
Now, I should also add that I expect all of my Growth Investor stocks to outperform in the coming weeks and months as earnings season gets underway. The fact of the matter is these stocks are characterized by 61.6% annual sales growth and 429.2% annual earnings growth — yet are trading at only 8.5 times median forecasted earnings!
I’m keenly aware of the rampant recession fears, as the Treasury yield curve briefly inverted and the Fed has had to raise key interest rates (along with other central banks).
This has spooked investors. But the fact is, my Growth Investor stocks are poised to profit from all the inflation chaos!
After all, we are loaded with energy, fertilizer, food, shipping and specialty semiconductor stocks. These stocks are an oasis for investors seeking steady sales and earnings growth.
P.S. I recently sat down with Wall Street legend Whitney Tilson, who Wall Street has dubbed “The Prophet” for correctly predicting many market moves. Now, our investing approaches may be different, but there’s one thing we can agree on: Something big is happening on August 29, 2022, in downtown Houston, Texas, that could set in motion the biggest investment opportunity in three generations.
So, if you think the market has been shaken up this year… you haven’t seen anything yet.
Whitney and I have been tracking this event for 40 years. What you do on that day will forever define who saw it coming — and had their money first… and who missed it completely.
We’ll be making an exciting announcement about this event soon, so keep an eye on your inbox!
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Alibaba (BABA), Amazon.com Inc (AMZN)