22 Jul 2021, 10:57

China has emerged as one of the strongest economies from the Covid-19 pandemic. While other nations struggled to grapple from the spread of resurgent virus, China has posted a fast recovery. Therefore, many investors have been asking us at EmSociety, is this the right time to invest in China stocks?

There are many strong reasons for investors to be confidently bullish on China. However, if investors were hoping for a strong performance in the Chinese stock market, sadly, they have been disappointed. Since the start of the year, the S&P 500 index has posted strong results. But the China A50 index has been trending down instead. In fact, the US and China stock market has never been so strongly divergent before (see chart below).


Many factors have contributed to the bearish 2021 of the China stock market. Firstly, the Chinese government has been cracking down on major Chinese tech companies like Alibaba and Didi Chuxing. This has led to a lost of investors’ confidence in some of the major Chinese companies. Investors worry that the state are now increasingly encroaching into the private sector. Secondly, the potential decoupling of the US-China economies. The US government has been tougher on China. Rather than removing tariffs, in fact, they have been imposing tougher sanctions. The increasingly aggressive posturing by the US government towards the Chinese has led to some roadblocks to curb China’s economic rise. Therefore, this has led to the poor performance of the Chinese stock market this year.

Is this an opportunity or a curse?

Compared to US stocks, Chinese stocks remain relatively cheap, in terms of valuation. Could this become an opportunity to buy the likes of Alibaba and Tencent at such low prices? Chinese stocks have become value investment plays compared to the overbought US stocks. Value investors would see this as an opportunity to accumulate them. However, does this mean that Chinese stocks would rise up in the near future?

Let’s take a look at some China stock charts to see what could be holding them back.

As most of you would have known, Alibaba (BABA) stock price had been under-attacked since the cancellation of the IPO of Ant Financial. Investors who are bullish on BABA would have bought this stock now that it is relatively cheap as they believe that the worse must be over for Jack Ma and co. However, as you can see from the chart 2 above, the stock has been heavily resisted by a very strong channel line. Everything it tried to break above, it got pushed down by the bears instead.


Let’s look at another stock Pinduoduo (PDD)

PDD similarly had a strong channel resistance which it could not break above. And as it tried to break above, it got shot down instead. 

Therefore, when is a good time to enter China stocks?

Value investors may want to buy these stocks now as they are “cheap” in terms of valuation. They believe that eventually these stocks will rise from their “cheap” valuations.

Here’s the thing. Buying cheap does not mean that prices would rise quickly in the future. It does not mean that if investors were to sell and take profit on the expensive US stocks, they would rotate and now buy cheap Chinese stocks, and hence, sending up stock prices of Chinese stocks immediately.

What would we have done at EmSociety?

Firstly, let’s take a look at the Alibaba chart as an example. As you can see, there is a very strong resistance in the chart. Everytime the stock touches this line; it keeps on dropping down. It is obvious that this line is acting as a strong obstacle for it to gain new bullish momentum.

Therefore, in order for us to consider an entry and buy Alibaba’s stock, this line must be broken above. Only when this line is broken above (like the arrow in the chart above), then it is most likely that Alibaba could see renewed investor’s confidence in the stocks and a new bullish momentum could be built.

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