Dare to invest in Chinese stocks? Focus on these sectors…

Just like that, 4 years of Alibaba (NYSE:BABA) gains vanished in less than a year.

On Aug 11, China released a five-year blueprint detailing plans to regulate the Chinese economy — confirming investor fears that the crackdowns won’t be ending anytime soon. Meaning, more pain to come.

Putting the “common” back in common prosperity

Chinese government regulations are making Chinese stocks an unpredictable investment. Last week, President Xi Jinping gave a speech on China’s growing wealth inequality and the “promotion of common prosperity”. Among his talking points to chill investors were:

• An active promotion of legislation in national security, technological innovation, public health, anti-monopoly and more.
• Ensuring the “healthy development of new business forms” with “good laws and good governance” related to the digital economy and similar areas.

But one message is clear: China is willing to sacrifice business profits to meet national goals. The news immediately affected the luxury market, propped up by Chinese buyers — wiping out $70b in market value from Europe’s 4 biggest luxury names (LVMH, Kering, Hermès and Richemont).

But across the board, no Chinese company had a wilder ride than Alibaba.

More pain but no gains for Alibaba

Alibaba – with the largest $25b IPO in history – used to be the darling of China’s e-commerce. But at the end of 2020, things began to go south for the tech giant:

• Nov. 2020 — Ant Group’s (33% owned by Alibaba) mega IPO was postponed after Ma criticized China’s politically connected financial institutions.
• Dec. 2020 — China launched an antitrust investigation into Alibaba for abusing its market dominance, hurting its stock price.

The latest regulations meant more bad news for Alibaba – internet companies will be prevented from blocking competitors out of its app ecosystem. The news sent Alibaba’s stock down 9% last week, now trading below its 2017 price.

Investors: Keeping a pulse on politics

Investors daring to venture into Chinese stocks took up a different strategy – investing in sectors aligned with the Chinese government’s goals, which include:

• Producing over 70% of its semiconductors domestically by 2025 – leading to a 446% rise in Chinese semiconductor investments.
• Achieving net zero emissions by 2060 – sending Chinese EV and solar-panel manufacturers up over 4% in August.

The NASDAQ Golden Dragon China Index (NASDAQ:HXC), which tracks US-listed firms with the majority of their business in China, is now down over 50% on the year. If you thought the worst is over, think again.