The U.S. vs. China - A Tale of Two Equity Trends

The markets heard from the Fed on Wednesday, December 15. Even though Chairman Powell and the FOMC put on their best hawkish faces and accelerated QE tapering, the stock market rallied in the wake of the final 2021 meeting. The stock market now faces end-of-year window dressing and tax-loss selling over the coming sessions as the end of 2021 approaches. The Fed will increase short-term interest rates in 2022. However, real rates could remain in negative territory for as far as the eye can see based on the current inflation readings. The committee forecast a 0.90% Fed Funds rate in 2022 and a 1.60% rate in 2023. Inflation is at far higher levels.

While US stocks rallied in 2021, the trend in Chinese stocks remains lower, which is an opportunity for value investors but a red flag for many market participants.

The US and Chinese economies are dominant

• The US and China are competing for the economic leadership of the world.
• Two different political systems have significant ramifications for the global economy.
• Chinese and US companies have very different reporting requirements and corporate structures.
• Investors have embraced US stocks while rejecting Chinese stocks in 2021.
  
  

Didi has been a poster child for Chinese stocks

• Didi Global Inc. (DIDI) is China’s answer to Uber Technologies Inc (UBER) and Lyft Inc (LYFT).
• The NASDAQ listed DIDI shares on June 30, 2021. The shares traded up to $18.01 on the listing day and were $6.28 on December 17, not far above the recent $5.82 low.
• The Chinese Large-Cap ETF (FXI) was at the $36.34 level at the end of last week. It closed 2020 at $46.43, traded to a peak of $54.52 in mid-February, and was 21.7% lower in 2021 as of December 17.
• The S&P 500 closed 2020 at 3,756.07. At 4,620.64 on December 17, it was up 23% in 2021.
  
  

Charlie Munger loved BABA in Q3 - How does he like it now?

• In Q3, Warren Buffet’s sidekick, Charlie Munger, disclosed he added to his long position in Alibaba (BABA).
• News of the value investors’ buying lifted BABA from $138.43 on October 4 to a high of $182.09 on October 20^th and 22^nd, a 31.5% rally.
• On December 17, BABA was below the October 4 low at $122.10, a decline of 32.9% from the late October high. BABA traded to a low of $108.70 on December 3 which was the lowest level since April 2017.
• It will be interesting to see if Mr. Munger sold his holdings at his next disclosure in early Q1 2022.  
   

US - China relations are a problem

• China and the US are at odds over Taiwan and the South China Sea.
• China is preparing to release a digital yuan; the US is nowhere near releasing a digital dollar.
• The Chinese government continues to expand its sphere of influence worldwide to secure raw materials, cooperation, and support.
• China and Russia have been cooperating and opposing many US policies.
  
  

Delistings could be on the horizon for 2022

• Fears of delisting Chinese stocks from US exchanges are weighing on prices.
• China’s political agenda suggests raising capital in US markets may not suit its plans.
• US regulators find Chinese corporate structures challenging and misleading.
• Chinese stocks could move to other worldwide exchanges by mutual consent for political reasons.
  
  

The value may not be worth the risk

• Charlie Munger saw value in BABA, and other value investors followed, lifting the stock in October.
• The market sent Mr. Munger and value seekers a loud message.
• Any asset’s current price and trend is always the right price and trend.
• The price action in BABA, DIDI, and FXI signifies that the value comes at a substantial risk.
  
  

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!