It’s been a tough couple of months for leading Chinese stocks. Worries about a slowdown in the world’s second-largest economy, particularly in the slumping real estate sector, have hurt China’s stock market. The SSE Composite Index in Shanghai has tumbled 15% in the past 12 months while Hong Kong’s Hang Seng Index has plunged 30%. Meanwhile, the S&P 500 has gained more than 20% in the past year.
But is the worst over for top Chinese companies? Shares of Alibaba (NYSE:BABA) soared 8% Tuesday after the New York Times’s DealBook reported that Alibaba co-founder Jack Ma and chairman Joe Tsai had each bought more shares in the e-commerce and cloud giant. Alibaba was up again on Wednesday.
Alibaba rival JD.com (NASDAQ:JD) rallied as well, as did shares of other leading Chinese tech stocks, such as search leader Baidu (NASDAQ:BIDU), social media and gaming powerhouse Tencent (OTCMKTS:TCEHY) and electric car maker Nio (NYSE:NIO). PDD Holdings (NASDAQ:PDD), the parent company of the popular online shopping platforms Pinduoduo and Temu, rose on Wednesday as well.
The reported stock purchases by Ma and Tsai are certainly a sign of confidence and could suggest that Alibaba and the overall Chinese stock market have bottomed. Investors are also growing increasingly optimistic about the possibility of more stimulus from Beijing. Bloomberg reported Tuesday that a nearly $280 billion market stabilization package is in the works, where state-owned financial companies would buy up local shares of Chinese stocks.
Some on Wall Street are growing increasingly optimistic about a China recovery. John Lin, chief investment officer of China equities for AllianceBernstein, and Eric Liu, an AB portfolio manager for Asian fixed income, wrote in a report this week that “investors shouldn’t be deterred by the housing sector’s woes” in China, adding that “as the housing crisis fades further in the rear-view mirror over the next year or two, we believe the quality of China’s economic growth will improve.”
Lin and Liu noted that “targeted economic reforms could help China derive more economic growth from innovation in consumption, services, technology and higher-value-add manufacturing” and that “the long-term outlook for Chinese equities is promising,” especially since valuations are cheap compared to the past ten years.
How to Play a Rebound in Chinese Stocks
So, if a China rebound is really in the beginning stages, what are the best ways to play it?
Analysts are fairly bullish on the big Chinese tech stocks. According to TipRanks, analysts have “buy” recommendations and price targets suggesting significant upside on Alibaba, JD, Baidu and Nio, as well as on Nio competitor Li Auto (NASDAQ:LI), online travel site Trip.com (NASDAQ:TCOM) and gaming stocks Netease (NASDAQ:NTES) and Bilibili (NASDAQ:BILI).
For investors looking to go the exchange-traded fund route and gain exposure to all of these companies and other top Chinese firms, there’s the iShares MSCI China (NASDAQ:MCHI) and iShares China Large-Cap (NYSEARCA:FXI) ETFs as well as the KraneShares CSI China Internet (NYSEARCA:KWEB) ETF.
The Bottom Line
Yes, the economic headlines from China over the past few years have been largely gloomy. But investors looking ahead could see rewards.
“China is changing, and transition often creates uncertainty in financial markets,” said AllianceBernstein’s Lin and Liu. “But dislocations can also create opportunity for investors who don’t succumb to negative short-term sentiment and take a longer view of China’s economic journey toward healthier and more sustainable growth.”
As of this writing, Paul R. La Monica did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
