Chinese Government’s Stimulus Package Boosts Equities
Amidst the financial whirlwind of September 23rd, the Chinese government unveiled a monumental stimulus package that exceeded all forecasts. This comprehensive economic boost included monetary measures that drastically reduced mortgage rates in a bid to revitalize the stagnant real estate sector. Suffering from years of dormancy, this market resurgence, coupled with a gloomy financial outlook, heavily discounted equity prices, and heightened short interest, propelled Chinese stocks into the stratosphere, marking their most significant surge in recent memory. Leading Chinese ADRs such as JD.com and Futu Holdings saw meteoric rises of over 50% in the last month, while UP Fintech Holding experienced an astonishing 240% surge before undergoing a modest correction this week.
Image Source: Zacks Investment Research
Chinese Market Faces Its Worst Decline Since the Financial Crisis
Following a remarkable multi-week bull run, Chinese stocks finally paused for breath, experiencing a substantial correction. The iShares China ETF, serving as an indicator for large-cap Chinese stocks, surged from $25 to $37 over recent weeks, boasting gains in 11 out of 13 trading sessions before retracing approximately 9% on Tuesday. Numerous analysts were quick to draw parallels, likening this single-day plummet in Chinese equities to the darkest days of the Global Financial Crisis, triggered by the collapse of Lehman Brothers.
Investors Analyze the Dip in Chinese Market
While the abrupt downturn in Chinese stocks may have rattled those who joined the bullish bandwagon, it pales in comparison within the context of the colossal short squeeze that transpired. A 10% pullback during a severe market downturn differs vastly from a 10% decline post a significant short squeeze. Notably, the retreat in the FXI, relinquishing a third of its recent gains, positions the stock around its short-term 10-day moving average for the first time. This juncture presents a golden opportunity for investors who failed to capitalize on the initial surge but are now enticed to enter the market at these more stabilized levels.
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Buybacks as a Positive Influence on Market Sentiment
Alibaba, a dominant force in China’s e-commerce landscape, emerges as a prime candidate for keen investors anticipating market moves. Much like Apple did in bygone years, Alibaba is buoying its own stock through aggressive buyback programs. Recent data suggests that the company engaged in daily share repurchases throughout September, culminating in buybacks exceeding $4 billion in the third quarter. Although buyback activity paused amidst the market frenzy, it is highly probable that Alibaba will seize the current market dip to reignite buybacks, thereby throttling the supply of shares and propelling stock prices higher.
Chinese Equities Present Value Amidst Recent Volatility
Notwithstanding the dramatic short squeeze felt in Chinese markets, valuations continue to remain attractively priced. For instance, Alibaba’s price-to-sales ratio stands at approximately 2x, a mere fraction of its 2020 valuation.
Image Source: Zacks Investment Research
Conclusion
While Chinese stocks endured a tumultuous day on Tuesday, underlying fundamentals and technical analysis suggest that the recent market dip signifies a potential buying opportunity rather than a definitive market peak.
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