U.S. stocks soared yesterday after Donald Trump’s decisive victory in the presidential elections. Leading indices, including the S&P 500 Index ($SPX), the Nasdaq Composite Index ($NASX), and the Dow Jones Industrial Average Index ($DOWI) all set record highs – and so did Bitcoin (BAX24), given Trump’s pro-crypto views.
The price action after Trump’s victory followed along expected lines, with steel names rising sharply amid hopes of tariffs on steel imports. Green energy stocks crashed, with the notable exception of Tesla (TSLA), whose CEO Elon Musk was perhaps among the key architects of Trump’s victory.
Chinese Stocks Crashed After Trump’s Election
Also expected was the fall in Chinese shares, as Trump vowed to increase tariffs on Chinese imports even further.
Specifically, Chinese e-commerce and cloud giant Alibaba (BABA) fell 2.5% and extended its October losses. Based on Wednesday's closing prices, BABA stock is now down almost 18% from its recent highs, and is on the verge of falling into the bear market territory.
Notably, Chinese stocks - including Alibaba - spiked last month and enjoyed the rally of a lifetime after China unleashed a flurry of stimulus measures, both monetary and fiscal. The Communist country continues to announce more measures, and is expected to unveil a massive fiscal spending plan after the parliament meeting concludes this week.
The timing of that meeting was not lost on anyone, as it coincided with the U.S. elections. It is widely believed – and not without reason – that the world’s second-biggest economy will announce an even bigger stimulus to bolster its growth before Trump takes office. Notably, China announced its monetary easing bazooka shortly after the Fed cut rates for the first time since 2020.
What Could a Trump Presidency Mean for Chinese Stocks?
While the initial reaction in Chinese stocks after the U.S. election results was predictably negative, I believe Trump’s presidency won’t be all that bad for Chinese stocks. Unlike last time - when Trump started imposing tariffs on Chinese stocks toward the middle of his tenure, which was followed by hard negotiations and a final deal where China agreed to step up imports from the U.S. - things might move a lot faster this time around.
Also, cognizant of its slowing economy, China might want to reach some sort of rapprochement with its biggest trading partner. There are ample signs that Chinese President Xi Jinping has scaled back his hard ideological stance, and the country has even mended relations with neighbor India after ties were strained by the deadly 2020 border clashes. China has also toned down its rhetoric against tech companies, and at least for now, the chances of a 2021-like tech crackdown looks near-impossible.
One of the key catchphrases of Chinese President Xi Jinping is that “houses are for living in, not for speculation.” However, the country has unleashed a massive housing stimulus and eased home-buying restrictions for some families, which looks contrary to Jinping’s previous stance towards the sector.
Alibaba Stock Forecast
Sell-side analysts continue to remain bullish on BABA, and it has a consensus rating of “Strong Buy” from the 16 analysts in coverage. Its mean target price of $120.88 is nearly 25% higher than Wednesday’s closing prices, while the Street-high target price of $145 is almost 50% higher.
Should You Buy Alibaba Stock?
BABA is a play on two aspects. First, analysts expect the company’s growth – both on the bottom line and top line – to pick up in the next fiscal year. The optimism seems to bake in the massive stimulus that China has announced.
Second, Alibaba is also a valuation re-rating play, and trades at a next 12-month (NTM) price-to-earnings (PE) multiple of 10.7x, which is less than a third of what its U.S.-based peer Amazon (AMZN) trades at. While Alibaba might never command the same kind of multiples as Amazon - among other factors, due to being based in China - even some valuation rerating can lead to massive gains for investors.
BABA is an Undervalued Restructuring Play
On a similar note, Alibaba was looking to unlock value by listing its six business segments separately. That process, however, went into cold storage as the company’s cloud and artificial intelligence (AI) segment called off the listing plan due to U.S. chip export restrictions.
I don’t expect much respite on the chip export ban under a Trump administration, but if the two countries can reach some sort of middle ground on trade, it would help in the re-rating of Chinese stocks like Alibaba.
On the upside, a U.S.-China trade deal under the Trump administration, coupled with a revival of the Chinese economy after the stimulus measures, could be the goldilocks scenario for Chinese stocks. On the downside, given Trump’s unpredictability, we could see the trade relations worsen even further if China is not able to address Trump’s concerns over the wide trade surplus in its favor.
Overall, I am cautiously optimistic about Alibaba, and see the stock's risk-reward as reasonably attractive. However, investors should brace for volatility – not only in Chinese stocks but also in U.S. markets – as one of the highlights of Trump’s first tenure was those market-moving early morning tweets, which we should get plenty of in his second tenure also.
On the date of publication, Mohit Oberoi had a position in: BABA , AMZN , TSLA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
