Amidst the vast ocean of investors, the figure of Michael Burry stands tall. Renowned for his contrarian stance, his name remains etched in the annals of financial history due to his prescient bets against mortgage-backed securities prior to the cataclysmic 2008 financial crisis, as portrayed in Michael Lewis’ The Big Short.
Burry’s Scion Capital Management garnered $725 million in profits for investors during that tumultuous period, with his personal earnings amounting to $100 million.
The spotlight has once again shifted towards Burry, as his recent moves have raised eyebrows across the financial landscape. Burry’s latest bet? Chinese tech stocks.
The Bold Stance of Michael Burry
Approximately 46% of Burry’s portfolio now rests in a trinity of Chinese tech giants. At the forefront is Alibaba (NYSE: BABA), constituting 21.3% of his holdings by the close of the second quarter. This was closely followed by Baidu (NASDAQ: BIDU) at 12.4%, and JD.com (NASDAQ: JD) at 12.3%. Burry initiated these purchases in Q4 2022.
Despite recent fluctuations, Chinese equities have faced a prolonged spell of neglect in the investment sphere. One only needs to glance at the underwhelming performance of the iShares MSCI China ETF compared to the S&P 500 to grasp the stark contrast.
The recent surge in Chinese stocks can be attributed to Beijing’s measures to relax lending rates and restrictions, hinting at a potential vindication of Burry’s strategic patience.
On the Same Boat: David Tepper’s Odyssey
Michael Burry isn’t navigating the Chinese stock sea alone. Billionaire investor David Tepper, spearheading Appaloosa Management, is following suit with a keen interest in Chinese equities. Tepper’s primary pick mirrors Burry’s, with Alibaba representing 12.2% of his portfolio. Additionally, Pinduoduo’s parent company, PDD Holdings (NASDAQ: PDD), comprises 4.2% of his holdings.
Tepper’s allegiance extends to a consortium of Chinese enterprises, including Baidu, the Kraneshares CSI China ETF (NYSEMKT: KWEB), JD.com, and KE Holdings (NYSE: BEKE), collectively amounting to 6.6% of his investment portfolio.
Almost a quarter of Tepper’s holdings find solace in Chinese stocks, a journey that commenced in Q2 2022 with Alibaba taking the helm.
Chinese Stocks: A Tale of Contrasts
While numerous investors raise red flags regarding the overvaluation of the U.S. stock market, Chinese stocks present a starkly different narrative. With an attractive price-to-earnings ratio of 11.6 for the iShares MSCI China ETF, in stark contrast to the iShares Core S&P 500 ETF‘s P/E of 29.4, the lure of Chinese equities intensifies.
The burgeoning cost of AI stocks in the U.S. has accentuated the notion of an inflated S&P 500. This quandary has propelled mavens like Burry and Tepper to seek greener pastures, where the potential for manifold returns beckons. The prevailing valuation gap signifies muted expectations for Chinese stocks, presenting an avenue where even modest growth could catapult them beyond the S&P 500.
Navigating the Choppy Waters
Despite the beckoning allure of Chinese stocks, caution remains a prudent companion. The wounds inflicted by a tumultuous past haunt many investors, with the lingering specter of a fragile Chinese economy casting a shadow over the horizon.
While dwindling interest rates and a more receptive monetary policy stance adopted by Beijing paint a flicker of hope, the overarching weakness in the Chinese economy, coupled with subdued consumer spending, casts a veil of uncertainty. The road to recovery for stocks like Alibaba and JD.com remains shrouded in ambiguity, with U.S. chip export sanctions further clouding the horizon.
The looming threat of a regulatory blitz, akin to the Ant Financial IPO debacle of 2020, hovers ominously over the Chinese stock realm. The low valuations notwithstanding, the sector remains a breeding ground for risk.
A Beacon of Hope: Potential Amidst Peril
In the midst of the turbulent tides, one Chinese stock shines brighter than the rest. PDD Holdings, the parent company of Pinduoduo and Temu, emerges as a resilient contender that has outshone Alibaba and JD.com amidst the Chinese market doldrums.
PDD Holdings continues its robust growth trajectory, navigating the turbulent economic waters with finesse. Its international success story presents a valuable avenue for revenue diversification, all the while standing at an enticing valuation.
The vessel of Chinese stocks sails amidst turbulent seas – should you embark upon this journey? The answer remains veiled in uncertainty, contingent upon the shifting winds of the global economy.