By Matein Khalid
2021 was a classic annus horribilis in the Chinese stock market as even a wannabe bottom fisher in Alibaba at 160 like moa can attest. Yet the 37% plunge in MSCI China index and Hong Kong red chips was the worst financial performance in the Middle Kingdom since the 2008 global financial meltdown. The pain was most concentrated in Chinese internet and property developer shares, given the virulence of President Xi Jinping’s regulatory crackdown and the $300 billion Evergrande debt debacle, with all its attendant contagion risk.
A brutal bear market is not exactly the ideal venue to juggle falling knives, as I learnt the hard way from my 160 strike Alibaba put sale. When bearish psychology goes ballistic, metrics of fundamental value means squat. Yet I am certain that these metrics will play out in the long run even in a totalitarian Marxist-Leninist state where the sanctity of property rights and the rule of law is an alien concept, as it is in most emerging markets.
My thesis on China in 2022 is anchored by the fact that the PBOC is the only major global central bank in easy money mode now and fiscal stimulus smoke signals are emanating from the Politburo’s chimney. This will mean at least two RRR cuts by the central bank, rise in government mandated loan growth, an ease in provincial debt issuance and property finance metrics. This macro milieu is a necessary but not sufficient condition for a bull run in Chinese equities as the loss of confidence among local and global investors has been truly epic since 2020.
The property market is still in distress and the Winter Olympics anti-pollution drive will hit industrial production at the same time as the pandemic fourth wave dampens consumer demand. I believe a sustainable bull market needs Beijing to whisper tender sweet nothings to its battered internet sector, ease the regulatory crackdown and moderate its populist diktat and seek a rapprochement with Washington on trade, technology, Hong Kong, Sinkiang and potential naval conflict in the Strait of Taiwan and the South China Sea.
The proof of the pudding in Shanghai and Hong Kong will only come when we see credible earnings/export growth and a more benign regulatory zeitgeist. Will the Year of the Tiger see a revival in Chinese e-commerce colossus Alibaba? I hope so and last Thursday’s 10% surge was a good omen even though Friday’s profit taking was a bummer.
Alibaba was in the crosshairs of President Xi ever since its ill-fated, aborted Ant Financial IPO and now trades at 119 in New York. I remember Alibaba was $310 in October 2020 and $230 around New Year’s Day 2021. While I doubt we see $200 in BABA in 2022, a pop to $160 or 13X non-GAAP earnings is entirely possible, even given management’s lower guidance on growth/margins and the regulatory storm clouds on data privacy and antitrust issues.
Matein Khalid is Strategic Advisor – Asas Capital
Also published on Medium.
