Why Chinese Stocks Are Ripping Higher Today
Another day and more news about Chinese stocks. The group ripped higher after Chinese leaders pledged further support for the Chinese economy following an unexpected meeting Thursday.
Shares of the fast food company Yum China (NYSE: YUMC) surged as much as 20% this morning before giving away some of those gains. Meanwhile, shares of the e-commerce company PDD Holdings (NASDAQ: PDD) and the search engine and artificial intelligence company Baidu (NASDAQ: BIDU) rose as much as roughly 15% and 12%, respectively, this morning before giving back some of the gains.
Backing up the support
Starting on Tuesday, China's central bank rolled out a slew of stimulus measures and interest rate cuts to try to lift China's struggling economy and hopefully revive the government's 5% gross domestic product target growth rate this year, which analysts are now concerned about. Those measures include lowering reserve requirements at banks, so they have more capacity to lend, dropping interest rates and down payment requirements on mortgages, and injecting capital into financial companies in China so they could do more investing whether in stocks or even repurchasing their own stock.
While the measures certainly sparked optimism, the rally stalled yesterday on concerns that interest rate cuts and stimulus may not be enough to get China out of its slump. The economy is dealing with a housing crisis, deflationary concerns, high unemployment, and weak consumer demand.
In an unexpected Politburo meeting today, the committee, which is led by President Xi Jinping, reportedly said, "We should increase the intensity of countercyclical adjustment of fiscal and monetary policies." The Politburo also reportedly said it is planning to issue government bonds to support "the driving role of government investment."
The Politburo is considered the principal policymaking committee composed of high-ranking officials and charged with driving the country's political, economic, and social priorities. What made this specific meeting interesting, according to analysts at Morgan Stanley, is that the Politburo typically does not meet in September, suggesting "an increased sense of urgency."
Investors seem to be coming around on China after a tough year so far for the group. According to Goldman Sachs, Chinese stocks on Tuesday saw the most daily net inflows in roughly 3.5 years and the second most over the past decade.
The group got another shot of confidence this morning from one of the world's best investors. Billionaire investor David Tepper told CNBC that he would recommend buying "everything" in China, from exchange-traded funds (ETFs) to futures. He said he's been growing more bullish from when the Federal Reserve cut interest rates last week to China's first stimulus announcement and rate cut to this most recent news about the Politburo.
Understanding the landscape
As I've said over the last few days, Chinese stocks operate in a much different landscape than U.S. stocks. The government has more influence and the economy doesn't always move in the same direction as other global economies. As you can see today, the sector is almost benefiting more from pledged support from China's government than the actual stimulus measures announced earlier this week.
Stocks like Yum, PDD, and Baidu should see a nice lift if China can get the economy going, as consumers will have more money to spend eating out, benefitting companies like Yum, and more money to buy consumer products, benefitting companies like PDD. It's also worth noting that all three of these companies trade at much more reasonable multiples than similar companies in the U.S. generating similar levels of growth.
But if you don't have time to conduct significant due diligence on each of these companies and how China's economic pressure and regulatory landscape might impact them, and still want some exposure to China, I would recommend investing in an ETF holding a basket of Chinese stocks.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu and Goldman Sachs Group. The Motley Fool has a disclosure policy.
Why Chinese Stocks Are Ripping Higher Today was originally published by The Motley Fool