For my first Real Money column of my Asia trip, I must address the elephant in the room. Pachyderms are revered on this continent, but it's really a different mammal that concerns me.
China is in a bear market. The Shanghai Composite is trading flat this morning, but that doesn't change the fact that the main SSE Index has fallen by more than 11% in the past month. As U.S. tariffs on Chinese goods are set to go into place Friday and the market waits for China's reply, there is fear among market participants. The key for an active asset manager is to differentiate between fear and freak-out, and sometime the main index is not the most useful indicator.
To really gauge the amount of fear in China, I look to the secondary exchanges, the largest of which is Shenzhen. That city's bourse, the eighth-largest in the world by market capitalization, is known for its volatility and prevalence of hot-money stocks. For instance, Contemporary Amperex Technologies, the Chinese electric vehicle battery behemoth, traded limit-up for eight consecutive days after its initial public offering on Shenzhen's ChiNext board. That's a chase, not an investment, and Shenzhen seems to specialize in those.
So, I focus on the Shenzhen Composite (SZSE) rather than Shanghai's, and the numbers there are troubling. Shenzhen is down 13.1% in the past month and a scary 22.3% since hitting its 2018 high on Jan. 24. The presence of ZTE, which was the ninth-largest constituent of the SZSE index as of year-end 2017, is obviously not helping as its shares have plummeted by more than 50% since the Trump administration announced sanctions on the company in April. Clearly, though, Shenzhen is feeling the heat from a general uncertainty over Chinese equities.
It isn't any easier to predict the movements of stocks in China than it is the U.S. -- actually, I believe it is more difficult. However, I am confident that the saber-rattling between the Trump and Xi administrations will continue through the summer. It's a case of headline risk, and I don't see that going away soon.
As I have mentioned in prior columns I am hoping for a pullback in Chinese tech titans Alibaba Group Holding Ltd. (BAB) A, Baidu Inc. (BIDU) , Tencent Holdings Ltd. (TCEHY) , and Baidu-controlled streaming play iQiyi. I missed these stocks the first time around, but I do believe the demographics will produce growth rates for them well ahead of those for the U.S. FANG titans over the next decade. It's always better to buy any asset more cheaply, though, so I am holding off on BABA and the rest for now. Those stocks don't seem to be sensitive to valuation any more than Amazon.com Inc. (AMZN) and Netflix Inc. (NFLX) are, so I'll let sentiment rule the day.
Another way to play the Chinese tech titans is through (KWEB) , KraneShares' China tech stock ETF, which has a massive $1.42 billion in total assets. I believe the KraneShares folks are the smartest guys in the room when it comes to investing in China, and a passive approach serves to reduce risk from individual equities. Timing is crucial, though, and whether one's strategy is active or passive, I believe this is a time for caution on Chinese stocks.
Time will tell if an Asian contagion will impact U.S. markets, but thus far that doesn't seem to be the case. I've mentioned Boeing Co. (BA) and Caterpillar Inc. (CAT) as companies that would be hit in a tariff battle, and a trade war certainly does nothing to help Ford Motor Co. (F) or General Motors Co. (GM) , either. However, the FANG stocks have not been hit, and until that happens the elephant in the room will remain a local issue for Chinese stocks.
