September 19

Should You Buy Chinese Stocks Now?

Sale! Sale! Sale!

Sales are irresistible. Why pay full price when you can get a discount? Right?

Interest in US listed Chinese stocks reached new heights after China announced a crackdown on several industries – mainly digital payments, ride-hailing, entertainment, and education. Why did it spark so much interest?

Stocks in these industries dived. But is this a golden opportunity to start buying and investing in US listed Chinese stocks? To answer this question, there’re 3 considerations which we’ll discuss below.

#1 Regulatory Risk

It’s common knowledge that the Chinese government is cracking down on several industries, as mentioned – digital payments, ride-hailing, entertainment, and education. Are there going to be further crackdowns?

Investors love stability, especially regulatory stability. This is because regulatory stability brings about predictability. When things are predictable, there’s a sense of common understanding, leading to increased confidence. Investors (you and I) are willing to invest more in the stock market. Businesses are also more willing to hire and invest in their business.

With more money invested in the stock market, the outlook of business shines bright, giving companies the confidence to expand, innovate, increase headcount or even wages. As commercial and consumer spending increase, the economy feeds on itself and grows.

Let’s flip the situation. What happens when there’s drastic changes in regulation?

When there’s regular or sudden major regulatory changes, things get a lot unpredictable. This will trigger fear in the economy and stock market. Investors and businesses will be more unlikely to spend. Some businesses may not be granted enough time to pivot; they shut down for good. This reduces employment and optimism, at least in the short-run.

A drop in optimism results in a situation where the preservation of capital and wealth is more important than seeking for ways to grow it. Spending decreases and the overall economy and stock market contract.

#2 Market Capitalization

What is market capitalization? Market capitalization is the market’s valuation of the company. This is done by multiplying the number of outstanding shares and its price. And the good news is you don’t have to do the Math yourself! You can rely on websites such as TradingView.

Can you tell the market capitalization of Tencent Music Entertainment (TME) using TradingView?

Here comes the importance of knowing a stock’s market capitalization. Since market capitalization tells us the size of the listed company, you can tell how much a company has grown or shrunk over time. Let’s use TME as a case study.

Prices of TME collapsed from $37.78 in late Mar 21 to $7.87 in mid Sep 21. That’s a 75.2% decline. Given that TME didn’t change the number of outstanding shares, we can say that the market capitalization of TME has dropped by 75.2% to $13.18 billion.

This means that the market value of TME is only 1/4 of what it was at its height just 6 months ago. Ok, so what was TME’s market capitalization in late Mar 21?

$52.72 billion!

Now, that’s a drop of $39.54 billion from late Mar 21 to mid Sep 21.

Do you have the money to push the share price of TME up? As retail investors, we don’t have the financial power to move stocks. It’ll take a concerted effort from the financial institutions to return TME to its previous glory which isn’t happening yet.

#3 Trend

Let’s have a look of TME’s chart.

It’s clear from the gradient of the moving average indicator that the share price of TME has been on the slide.

Isn’t it a good time to buy when prices are coming down? After all, we want to buy things on the cheap. Right?

We want to buy things on the cheap except when prices are dropping consistently. Let’s use an example which you’ll be familiar with.

Imagine going shopping for shoes. You see a pair of shoes you really like. It’s going for $100. You decide to wait as you’re secretly looking to buy it at a discount.

A week goes by and you see the same pair of shoes at the same shop selling for $95. You know that this pair of shoes have been out for some time. It could soon be in the clearance shelf.

Another week goes by and it is now placed on the clearance shelf, going for $60. Assuming the quality of the pair of shoes remain the same as when it was 1st released, $60 is a bargain! But if you know that there’s usually a big sale coming up in a couple of days, you may even choose to wait.

What’s the moral of this story? Prices can go lower. Buying just because the price of a stock has dropped significantly is akin to catching a falling knife. If price continues to drop, your investment capital will take a hit, and you’ll lose the ability to capture other opportunities in the stock market.

When is a good time to buy TME or most of the Chinese stocks that are listed on the US stock market then? It’ll be best to wait for prices to stabilize and show signs of creeping up or show signs of recovery.

You can use the TPB Swing Trading strategy and indicators to help you identify the trend, optimal buy and sell prices, and increase your chances of success. By using the weekly TPB Swing Trading Strategy, you’ll stay invested in the market for a long time as long as the stock is still heading up. More on the TPB Swing Trading strategy can be found here.

5 Things You Must Remember

#1 Not everything that’s on sale is worth buying as prices can still go lower

#2 Drastic or major regulatory changes cause a chain reaction which can shift the economy

#3  We are retail investors and we don’t have the ability to influence the stock market

#4 Never catch a falling knife

#5 Use the weekly TPB Swing strategy can help you spot excellent investing opportunities

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Invest safely!

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