In 2017, President Trump proposed increased tariffs on more than 1,300 Chinese industrial products, which makes up 9% of US imports from China. In response, President Xi Jinping fired back at the United States with proposed tariffs on $50 billion of American imports, 36.7% of its total imports from United States.1 As the threats kept escalating due to this “Cold War” mentality, a trade war seemed inevitable.
However, in a speech a few day ago, Chinese President Xi promised to open the country’s economy further and lower import tariffs. He pledged to increase the number of exports, broaden market access to foreign investors, and strengthen the protection of intellectual property. This surprising speech was seen as an attempt to defuse an escalating trade dispute with the United States by offering a combination of sacrifice and resistance. While Xi appears to be the “bigger man” in this scenario by offering negotiation, he has only allowed for minimal change in the auto industry that experts expected to occur soon, regardless of Trump pressuring him. While it is not everything Trump desires, he seemed to react to the speech positively, and now economists are very optimistic that a trade war can be averted.2 It seems that both world leaders have decided that an all-out trade war does no good to either country, and will only harm many other countries relying on their products.
As a result of the subsiding hostility between the United States and China, stocks and futures have climbed so far this week, and will likely continue to do so, as long as fears of a trade war continue to decrease. Dow futures were more than 350 points above fair value, and excited investors poured money into equities, making the producer price index that came in 0.2% higher than expected seem irrelevant.3
In these times, it seems that a solid investment opportunity lies in a company that benefits from both the Chinese and American economy. Hence, I am proposing Alibaba Group Holding Ltd (NYSE: BABA) as a buy. Over the last three weeks, the stock has dropped 17%. However, if you compare the Alibaba stock price and the S&P 500 index for the last three months, they basically mirror each other, meaning the company’s stock has dipped partially because of the general market sell-off. The other reason the stock has dropped is because of the recent concerns for a trade war between the United States and China. These two reasons caused the stock price to drop from $190 to $167 over a three-week span, ending on Friday. This past weekend, I took note of Alibaba’s cheap price and upgraded its rating to a buy. Since Xi’s speech, in the past two days, the price has climbed 6% to $177.
I propose a “limit” purchase of Alibaba stock at $174-$175, due to the recent, massive increase that has occurred over such a short time span. When the company has a sell-off of stock or the general market decreases in the near future, the price is going to drop slightly, and that seems like a prime time to invest. Analysts are currently predicting that Alibaba stock will experience a 40% growth over the next 12 months, so the time to buy is immediately because the price will soon increase to a level where it is not so undervalued.4
Surprisingly, when conducting research, I discovered that only 2.2% of Alibaba’s revenue is associated with the United States, meaning that if the trade war was to somehow escalate, their earnings would not be substantially effected.4 Ultimately, earnings are what drive stocks and the broader stock market higher, and with earnings for Alibaba expected to skyrocket this year, I think buying now is a great opportunity.
There are some other factors that make Alibaba an attractive investment:
Singles’ Day 2017 (11/11 every year) in China resulted in $25B+ sales for Alibaba in only 24 hours, and it is expected to potentially be even larger this year.5
They are moving into more industries, such as entertainment, media, and cloud computing, making them an even larger global presence.5
CEO/Founder Jack Ma has an amazing ability to identify a problem, find a solution, and make money from that solution.
“For consumer product companies, if you win China, you win the world.” – Forbes5
- E*TRADE Research Platform