(photo credit: Aaron T. Goodman)
Nader Naeimi, the guy who correctly called the emerging market selloff back in October, is now being quoted by Bloomberg as being bullish on Chinese shares.
That doesn’t surprise me. First, the market rout happened very fast and the performance went down by a lot. For instance, from top to bottom the MCHI went down about 27%. Secondly, all that market action was exacerbated by the trade war. The Chinese policies targeting a deleveraging movement, and a spooky Chinese market also helped t increase the magnitude of the movement. Third, looking at fundamentals we are far from seeing a shift that justifies the magnitude of the selloff.
(Source: Yahoo Finance)
I had written two investment cases about on China (here and here), a couple of weeks ago, arguing exactly that. For weeks the Chinese selloff was a growing opportunity for savvy investors. Confirming that thesis, Baidu presented good results early this week, and Alibaba just released results that, although slightly below expectations, do not indicate weakness.
After the depressing storm, the market is now reading that the trade negotiations are going in the right direction, and the Chinese market rallied accordingly. However, I wouldn’t put my fate in a couple Trump tweets. We will have to wait and see what kind of deal, if any, will come out of the negotiations. If there is a reasonable trade deal, it would be better than the current status quo, and this would probably set a positive tone for the Chinese market. However, the unpredictable nature of president Trump will, most likely, bring turbulence during the negotiations.
The main conclusions from this week’s developments suggest that the market rout in the Chinese equity market was overdone. A possible trade normalization between the US and China could be the trigger to reverse the downward trend. During the last couple of weeks, I increased exposure to Alibaba (BABA), Baidu (BIDU), Tencent (TCEHY) and ZTO Cayman (ZTO).