Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
Not even Amazon can topple this company
China’s economy looks a lot more durable to me than most suggest. There’s a great potential trade you can make off this.
Here’s the story.
The Wall Street Journal reports that rents across 30 of China’s major cities are soaring.
For example, they’re up 20% in Beijing over the year.
They’re up 30% in Chengdu.
House prices in China in general are up 8% for the last 12 months.
This does not suggest a slowing economy to me.
After all, Melbourne rents look pretty measly in comparison, growing at 4% over the last year.
I find this a highly significant clue.
China still has millions of people urbanising.
Rising rents are a market signal for developers to build more homes. This supports the construction industry and, by extension, Australia’s mining industry.
Chinese economy could surprise to the upside over 2019.
Let’s dig around for some other clues.
China: misunderstood and hated
It’s no secret that China is trying to pivot its economy into high-tech areas, especially in semiconductors.
At one stage, China was spending more money on importing semiconductors than it spent on crude oil.
Chinese firms are now poaching Taiwanese and South Korean experts and offering hugely inflated salaries as they press forward to take down current giants like Samsung.
Microsoft is even considering using chips from China in its data centres based there.
China is now only second to the United States in spending on research and development (R&D).
There’s plenty of innovation happening.
Last month, the city of Hangzhou announced its ‘City Brain’ traffic management system.
This uses the cloud and artificial intelligence to predict traffic flow, detect accidents and issue alerts to the relevant city authorities.
Hangzhou is now ranked 57th for congestion in China.
It used to be fifth.
This technology could spread all over the country, making the whole place amazingly more productive.
And one company sits at the heart of it all.
Almost ten times as big as Amazon’s special day
That company is Alibaba Group Holding Ltd [NYSE:BABA].
You can think of it as something like the Amazon of China.
Let me give you an idea of the scale of this business.
Every year it holds a special sales day called Singles’ Day.
This is similar to the special shopping event Amazon now hosts called Prime Day.
Amazon’s sales for Prime Day in 2018 were an estimated US$3.5 billion in 36 hours.
Alibaba’s sales for Singles Day in 2017 were US$25 billion.
Keep your eye out for November this year when the next one is due!
Like Amazon, Alibaba is moving way beyond its online retail base into the cloud, logistics and more.
And yet Alibaba stock has taken a bit of a battering recently.
In the middle of this year, it hit as high at US$211 a share.
The trade war has brought it down.
One share will now cost you US$160.
That’s an almost 25% decrease.
And yet its last quarter earnings results showed 60% growth over the year.
That’s a very large figure for such a big stock.
Of course, it’s the next set of numbers that matter from here.
But there’s little to suggest Alibaba will suffer much from the current Chinese-USA spat.
Alibaba’s ecosystem dominates China and South East Asia.
In fact, the company services 100 million consumers outside of China.
In my mind, as a long-term play on the growth of these markets, Alibaba looks just as good as it did three months ago.
A sea of potential
Perhaps you could think of it like this.
If the trade war rhetoric settles down, it’s highly likely Alibaba will revert to its previous – higher – valuation.
That gives the company some good upside I feel, which doesn’t even include the massive growth runway in front of the company.
So there’s two potential kickers in front of the stock.
The potential downside looks a lot less menacing now than it did back in June.
That’s not to say it can’t go lower from here.
But I think the risk/reward payoff looks pretty sweet for a very compelling stock riding a long-term growth story.
So Alibaba is definitely one to keep an eye on.
And remember one thing when it comes to the urbanisation and rise of China’s middle class.
This huge uplift is only going to happen once.
Either way, don’t let the mainstream headlines shape your view of this company. They have a habit of steering you in the wrong direction.
You see, it was about 10 years ago I started out in the financial markets.
Back then, what I heard and read in the mainstream media was pretty much the same as I’m hearing and reading now.
Property’s going to crash! The economy is heading for a recession! The dollar is doomed!
And back then, I did what you might be doing right now, too.
I hesitated to load up on great share market opportunities. I held off buying a house in case prices fell. I considered taking a big position in gold.
What actually happened?
The markets BOOMED.
House prices ROARED
Gold did NOTHING.
Luckily, about five years ago, I embarked on a major journey of research to find out what really makes markets move the way they do.
And you know what I discovered?
It doesn’t matter if interest rates rise or fall.
It doesn’t matter if central banks ‘ease’ or ‘tighten’ the money supply.
If doesn’t matter if the UK leaves or stays in Europe.
And it certainly doesn’t matter who the latest prime minister to take control in Canberra is!
In fact, whether the market is going up, down or sideways – there are ALWAYS profitable trends to exploit.
And I’m going to prove it to you.
In the most unapologetic and opportunistic free publication in Australia today: Profit Watch.
The first issue goes out one week tomorrow, on Monday 8 October.
My goal with this new free daily resource is simple.
To show you the most compelling investment stories and ideas to watch so you can become a better, smarter and, hopefully, more profitable investor.
I hope today has given you a taste of what’s to come!