Chinese Stocks: Dip to Buy or Time to Avoid?

Key Points

• The MSCI China Index's 20% rebound from May lows, driven by Beijing's economic efforts, has been overshadowed by new EU tariffs and economic challenges, leading to a steep selloff in Chinese stocks.
• Chinese U.S.-listed stocks like JD.com and Alibaba have returned most of their gains, with JD down over 14% and Alibaba nearly 9% for the month.
• Despite the downturn, billionaire investors David Tepper and Michael Burry have increased their stakes in Alibaba and JD.com, showing confidence in these companies amidst market volatility.

Amidst the recent dip in Chinese stocks, investors are evaluating whether this downturn presents a buying opportunity or a signal to stay away. 

The MSCI China Index had shown a promising rebound, surging 20% from its bear market lows in May, driven by Beijing's efforts to revitalize the economy. However, recent developments, including new European Union tariffs on Chinese electric vehicles and renewed economic struggles, have led to a steep selloff. 

Notable Chinese U.S.-listed stocks like JD.com and Alibaba have returned most of their gains, with JD down over 14% and BABA down almost 9% for the month.

Impact of EU Tariffs and Recent Market Performance

On Friday, most Asian stocks declined, driven by cooling U.S. inflation and the introduction of new EU tariffs on Chinese electric vehicles, raising fears of possible retaliation from Beijing. The Shanghai Shenzhen CSI 300 and Shanghai Composite indexes in China dropped 0.6% and 0.4%, respectively, while Hong Kong’s Hang Seng index decreased by 0.6%. The Chinese markets experienced continued selling pressure after the EU announced significant tariffs ranging from 17% to 30% on imported Chinese electric vehicles.

While the U.S. had already imposed tariffs on China’s rapidly growing EV sector, the EU's actions are particularly significant as it is a crucial market for Chinese EV manufacturers. This development has heightened worries that the EU and the U.S. might enforce additional restrictions on Chinese imports. In response, Beijing could potentially implement retaliatory measures, further straining relations between the world’s largest economies.

Investor Confidence and Market Sentiment

Two prominent investors, David Tepper and Michael Burry, have recently increased their stakes in Alibaba and JD.com, suggesting confidence in these companies despite the market downturn. David Tepper of Appaloosa Management made Alibaba his top holding after more than doubling his position in Q1, with Alibaba now representing about 12% of his portfolio. Michael Burry of Scion Asset Management increased his stake in Alibaba from 75,000 shares to 125,000 shares, making it his second-largest holding behind JD.com.

JD.com: Potential Turnaround or Further Decline?

JD.com NASDAQ: JD is a prominent Chinese eCommerce company. Initially starting as an online magneto-optical store, the company has evolved into one of China's largest B2C online retailers, offering various products, including electronics, mobile phones, computers, and more. After the recent selloff, shares of JD have now sunk red during the year, down slightly by 0.4% YTD. The stock has attractive value metrics: a P/E of 13, a dividend yield of 2.57%, and projected earnings growth of 9.09%. However, from a technical analysis perspective, investors will want to see the stock reclaim the $30 critical level to maintain hopes and confidence in a turnaround.

Alibaba: Investment Opportunity or Bearish Signal?

Alibaba NYSE: BABA is a prominent eCommerce and Internet technology giant. Its primary platform, Alibaba.com, ranks as the world's third-largest eCommerce platform by sales. 

Like JD, the stock has now turned red again on the year after its steep, almost 9% selloff over the previous month. The stock now has a P/E of 16 and a dividend yield of 1.34%, with projected earnings growth of 12.07% for the entire year. Analysts are bullish and forecast a 48% upside based on their consensus price target. However, a worrying sign for BABA is that it is now trading well below all of its major moving averages, with momentum firmly on the downside, showing no bullish signals for investors.

Current Market Conditions for JD.com and Alibaba

While the recent dip in Chinese stocks might suggest a buying opportunity, the lack of bullish technical signals and the overall negative backdrop in the Chinese market indicate that it might be prudent to wait for clearer signs of stabilization and a turnaround before investing in these names. 

Although heavyweight investors have shown confidence in Alibaba and JD.com, the current market conditions and recent selloffs suggest that capital might be better allocated elsewhere until these stocks and the overall Chinese market show signs of stabilization and a turnaround.