China Stimulus Shocks, Fueling 2024 Equities Surge
With a grand wave of stimulus announcements on September 23rd, the Chinese government set the stage for a phenomenal market uptick. Riding high on this fiscal intervention, Chinese equities experienced a historic rally, fueled by a blend of pessimism, enticingly low valuations, and rampant short interest. Notably, stocks like JD.com (JD), Futu Holdings (FUTU), and UP Fintech Holding (TIGR) saw staggering gains of over 50% and 240%, respectively, in just a month.
Image Source: Zacks Investment Research
Chinese Stocks Saw their Worst Drop Since the Financial Crisis
After a relentless climb, Chinese stocks faced a much-needed correction post an exceptional winning streak. The iShares China ETF (FXI) witnessed a freefall of ~9% on Tuesday, marking the most significant single-day decline since the era of the Global Financial Crisis triggered by Lehman Brothers’ collapse.
Investor Conundrum: To Buy or Not to Buy?
The recent pullback in Chinese equities may have unnerved some investors, but in the grand scheme of the colossal short squeeze, it is faintly more predictable. Unlike a typical 10% retracement in a bear market, this reversal post a massive short squeeze is a different beast altogether. For instance, FXI is only retracing about a third of its upward surge, making it an attractive entry point for investors who missed the initial rally but stayed clear of chasing overly hyped stocks.
Image Source: TradingView
Buybacks Resonate as a Bullish Sign
Alibaba (BABA), a dominant force in China’s e-commerce landscape, mirrors Apple’s buyback strategy from yesteryears. With buybacks surpassing $4 billion in Q3 and a daily repurchase trend in September, Alibaba’s stock trajectory is primed for an upswing. Even amidst the recent market instability, buybacks are likely to resume, dwindling share supply and propelling prices.
Chinese Equities: A Haven for Bargain Hunters
Despite the recent frenzied activity in Chinese markets, valuations still remain at historically low levels. For instance, Alibaba’s price-to-sales ratio stands at approximately 2 times, significantly lower than its 2020 metrics.
Image Source: Zacks Investment Research
Bottom Line
Tuesday’s market shake-up in Chinese stocks may have caused a stir, but indicators suggest that this dip could actually be a golden buying opportunity instead of a signal to sell.
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