China Stimulus Propels Equities in 2024
In a move reminiscent of historical economic recoveries, the Chinese government unleashed a robust stimulus plan on September 23rd. This unexpected package, enriched with monetary incentives that included slashing mortgage rates to revitalize the stagnant real estate sector, breathed new life into China’s financial markets. The market, hitherto shrouded in gloom, witnessed a dramatic resurgence with record-breaking gains in Chinese ADRs like JD.com (JD) and Futu Holdings (FUTU) soaring over 50% in a month. Meanwhile, UP Fintech Holding (TIGR) saw an extraordinary 240% surge before retracing some gains on Tuesday.
Chinese Stocks Witness Largest Single-Day Drop Since Financial Crisis
After an unprecedented rally spanning several weeks, Chinese stocks experienced a much-needed correction. The iShares China ETF (FXI) surged from $25 to $37 over the past few weeks, soaring in 11 out of 13 sessions before a ~9% dip on Tuesday. This abrupt decline marked the steepest one-day plunge for Chinese equities since the Global Financial Crisis during the collapse of Lehman Brothers, signaling a notable shift in market sentiment.
Assessing the Market: Is it Time to Buy the Dip?
While the recent pullback in Chinese stocks may have rattled some investors, it is an anticipated outcome following the extraordinary short squeeze. A 10% retraction in a bullish market differs significantly from a similar decline emerging from a short squeeze scenario. For instance, as FXI retraces about a third of its upward movement, dipping close to its short-term 10-day moving average for the first time, it presents a favorable entry point for cautious investors who didn’t chase the initial surge but are now eyeing a strategic move at these levels.
Buybacks as a Bullish Catalyst
Alibaba (BABA), a prominent player in China’s e-commerce landscape, mirrors Apple’s past strategy by leveraging buybacks to propel its stock value. With buybacks exceeding $4 billion in the third quarter alone, BABA temporarily paused repurchases amidst the equity surge but is primed to resume this momentum on the dip. By reducing the available shares in the market, Alibaba’s buybacks are poised to drive its stock price northwards.
Chinese Equities: Resilient & Undervalued
Despite the recent short squeeze frenzy, Chinese stock valuations continue to remain attractively low. For instance, Alibaba’s price-to-sales ratio, standing at around 2x, represents a mere fifth of its 2020 valuation, accentuating the investment potential that prevails in the market.
Image Source: Zacks Investment Research
Bottom Line
As Chinese stocks faced significant turbulence on Tuesday, underlying fundamentals and technical indicators suggest that the current pullback presents an opportunity for savvy investors rather than a cause for concern.
