When investors think about the investment landscape, they often focus solely on the S&P 500 and the US stock market, not understanding or realizing that today global markets are more interconnected than ever, so if one asset class moves to Europe or Asia, this could immediately impact markets in other regions, potentially creating risk for those unaware.
Investors were recently able to see this effect in action when South Korea declared martial law, which will go into effect in December 2024. American investors woke up to the news, causing oil prices to rise from $68 a barrel to just above $70 a barrel. Of course, this kind of price movement in the energy sector will have many other implications for other sectors and stocks, so it’s critical to pay attention to other markets.
With this in mind, investors can – and should – pay attention to Asian bond markets, especially for the two leading economies – Japan and China. As it turns out, bonds in the two economies have moved closer together in a way that suggests Chinese stocks like Alibaba Group New York Stock Exchange: BABY, SDA Holdings Inc. NASDAQ: Traffic rulesand wider iShares MSCI China ETF NASDAQ:MCHI It could be a great buy today; as other mega-investors have calculated over the past two quarters.
Changing Risk Perceptions in Asia: China Wins Investor Confidence
First, investors need to understand bond yields and changes in those yields. Bond yields are the market’s way of telling everyone their inflation expectations for the future, with rising yields meaning higher inflation expectations and vice versa.
Secondly, they can also show investors the implied risk of investing in a country’s economy. There’s a reason why Brazilian 10-year bonds yield more than 13% while US 10-year bonds yield only 4.2%: Brazil has a higher perceived risk than the United States, as well as a higher perception of inflation.
Investors can analyze Chinese and Japanese 30-year bonds to gauge market perception. Currently, rates in Japan are trending higher while rates in China are declining, leading to a rare inversion where Japanese rates outperform Chinese rates, perhaps indicating that markets now view Chinese investment as less risky.
This inversion represents a unique opportunity to gain exposure to Asia’s strongest currency as broader markets and sentiment begin to shift positively towards Chinese equities. Additionally, the relationship between stock prices and bond yields in China offers investors another interesting aspect.
iShares MSCI China ETF today
iShares MSCI China ETF
(As of 12/6/2024 6:00 PM ET)
- 52 week range
- $35.58
▼
$59.78
- Dividend yield
- 2.47%
- Assets under management
- $5.58 billion
The CSI 300 index (China’s equivalent of the S&P 500) now offers yields that are twice that of Chinese 10-year bonds. Investors can profit through the iShares China ETF, which currently offers a dividend yield of 2.5%, which is higher than the 2.2% yield on Chinese bonds. While the difference may seem small, it signals a significant shift in the future.
All other things being equal, stock returns should never exceed the country’s bond yields. In the US, there have only been two occasions when the S&P 500 yield exceeded the US 10-year yield: 2008 and 2020. Both extreme situations did not last long.
A surge in Chinese stock buying could be on the horizon
The fact that the Chinese stock market, despite yielding higher than 10-year bonds, has yet to rise could signal that sentiment towards domestic equities is driven primarily by fear. As Warren Buffett likes to say, “Be greedy when others are fearful.”
Alibaba group today
(As of 12/06/2024 ET)
- 52 week range
- $66.63
▼
$117.82
- Dividend yield
- 1.14%
- P/E ratio
- 17.43
- Target price
- $114.07
Some investors, such as David Tepper, Michael Burry, Howard Marks and even George Soros, have taken this advice to heart. These legendary investors decided to start investing in China, particularly through Alibaba and PDD Holdings.
Wall Street analysts, risk averse as they may be, were bold enough to assign ratings to these stocks that reflected a more realistic scenario. For example, for Alibaba, the consensus price target today is set at $114, suggesting upside potential of up to 34.2% from today’s price.
However, some are willing to stand out from the crowd, such as Barclays. Reiterating their Outperform rating on Alibaba shares, these analysts set a price target for the company of $130 per share, a whopping 53% above where the stock trades today.
Traffic regulations today
(As of 12/06/2024 ET)
- 52 week range
- $88.01
▼
$164.69
- P/E ratio
- 9.75
- Target price
- $173.40
The same trend is seen in PDD stock today.
Analysts today have a consensus price target of $173.4, which puts the stock up as much as 78.1% from its current price.
However, Macquarie analysts have decided to upgrade their ratings from Neutral to Outperform for October 2024, this time calling for 130% upside to the $224 price target.
You should hear this before considering the PDD.
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