Why Alibaba, JD.com and Bilibili were climbing higher today

What happened

Actions of alibaba (Slime 6.81%), jd.com (JD 6.08%)Y bilibili (BILI 9.88%) rose sharply on Tuesday, up 6.6%, 6.6% and 9.3%, respectively, at 1:51 pm ET, during a relatively flat session for US markets.

Like other risk assets, Chinese stocks have sold off heavily in recent days. However, they have been doing better than US tech stocks lately. This is largely because they already collapsed last year amid a regulatory crackdown from Beijing. However, with Chinese authorities signaling an end to that crackdown, investor optimism about major Chinese cities reopening from their latest pandemic-driven lockdowns, and a more relaxed fiscal environment, Chinese stocks rose again on Tuesday. .

And that

On Friday, a worse-than-anticipated rise in the US Consumer Price Index stoked investor fears that the Federal Reserve may raise interest rates faster and harder than previously expected. . This was followed on Tuesday by a Producer Price Index report that showed a 10.8% year-on-year rise in May. Although that was a tenth of a percentage point lower than the April increase, it is still a very high number, indicating that inflation may not moderate any time soon.

However, while the US can expect more rate hikes, in China, the government is easing financial conditions, not tightening them, as growth has slowed and companies have cut their workforce in the wake of the crackdown. technology and COVID lockdowns. In May, the country cut a key interest rate in an effort to lower mortgage rates. After China’s housing bubble burst last summer, the authorities and its central bank are changing course and working to promote economic growth.

Given that investors around the world seem to be focused on central bank stocks at the moment, it is perhaps not surprising that money managers who can invest abroad are selling stocks in developed markets and “buying the dip” in the hit Chinese tech sector.

Additionally, each of these tech companies, while not reporting big numbers in absolute terms relative to their track record, beat all expectations for first-quarter revenue growth. While Bilibili fell short of its earnings expectations, Alibaba and JD.com also exceeded those expectations.

Now what

To be sure, Chinese tech stocks look cheap, especially as the country’s middle class continues to grow and consumer spending rises in what has traditionally been a manufacturing-based economy. However, investors should not necessarily expect a big rebound to pre-crash levels of growth or earnings.

New Chinese government regulations must remain in place, limiting the ability of market leaders to behave anti-competitively (for example, Alibaba’s forced exclusivity policy on its third-party merchants). Meanwhile, there is talk that the Chinese government could acquire 1% positions in several leading companies and take a more proactive role in its business decisions. While that could prevent those tech companies from running afoul of the government’s agenda (and thus help them avoid further fines), it could also limit their prospects for innovation and growth.

I wouldn’t be surprised if Chinese stocks rebound again and outperform US stocks in the short term. In the longer term, however, investors may have to contend with unpredictable regulatory actions by the Chinese government, as well as the prospect of rising geopolitical tensions between the US and China. The value of Chinese stocks may be such that it is worth allocating a portion of the portfolio to them. However, they belong in your “high risk” basket, especially when compared to more defensive US tech giants.

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