As difficult as the past several months have been for U.S. companies and their stocks, it has been even worse for their Chinese counterparts. Between Beijing's continued crackdown on the country's technology outfits and the drastic measures aimed at curbing the spread of COVID-19, China's GDP growth fell to a multiyear low of 3% in 2022. The Shanghai Composite Index of the country's top companies' equities struggled accordingly, largely led lower by its tech stocks. Not all analysts are particularly hopeful about China's bounceback this year, either.
If you're looking for an investment opportunity few others are thinking about, though, consider buying the combination of China's Alibaba (BABA 0.09%), Trip.com (TCOM 0.95%), and Tencent Holdings (TCEHY 1.91%). These stocks are still more down than up, but that may not be the case for long.
Look forward, not backward
These are tough stock picks to get behind if you're only looking at the recent headlines. As noted, China's economy is seemingly on the defensive. Beijing's targeted economic growth rate of 5% is better than last year's figure but is still one of the country's lowest growth targets in decades.
As hockey legend Wayne Gretzky explained of his phenomenal success, however, "I skate to where the puck is going to be, not where it has been."
Translation for investors? Stocks are priced based on their underlying companies' likely futures rather than their recent pasts. Trade accordingly.
That's admittedly easier said than done. Current headlines can easily knock stocks around, causing you to question your long-term thesis. That's why discipline is so critical in this game -- it's too easy to be distracted by short-term noise and take your eye off the bigger picture.
To this end, know that China's economy is bouncing back, led by the very consumerism that bodes so well for consumer-facing companies like Alibaba, online travel-booking outfit Trip.com, and digital entertainment platform Tencent.
Take the country's retail spending data as an example. While falling more often than growing since early last year, retail sales improved by an average of 3.5% in each of the first two months of the current year.
Perhaps the more encouraging detail of February's consumer spending report is how much of the growth stemmed from spending on highly discretionary goods like automobiles, and on services like dining and movies. Jewelry, tobacco, and appliances saw marked increases in purchases between January and February as well, according to the National Bureau of Statistics of China.
The fresh willingness to spend saved-up money matters. Fitch Ratings believes the country's economic recovery will "be primarily consumption-led, as households re-engage in activities previously hampered by health controls," echoing outlooks from JPMorgan Chase, Standard & Poor's, and others.
In the meantime, China's central bank is directly supporting the slivers of the nation's economy that its consumers can't, like real estate and infrastructure. Bolstering the budding rebound of China's beaten-down real estate prices, Beijing is dialing back its banks' reserve requirements to free up liquidity for new real estate loans.
The country's federal government is also still committed to spending the $2.3 trillion earmarked for infrastructure projects last year. That outlay will not only help boost real estate values and increase the amount of new land that can be developed, but create jobs as well.
Green shoots
The beneficial impact of this spending isn't readily evident just yet. Here's the rub: Investors are being asked to take a plunge on a rebound they can't clearly see. That's tough to do.
There are clear glimmers of a real turnaround taking shape, though, which specifically favor outfits like Tencent, Alibaba, and Trip.com.
Case in point: Travel industry technology company Sabre reported nearly an 80% surge in online travel inquiries after China lifted its COVID-19-curbing travel restrictions in late January. Airlines are struggling to keep up with this fresh demand despite sky-high airfares. Better still for Trip.com, the Chinese Outbound Tourism Research Institute says interest in domestic, in-country travel is just as strong as interest in leaving the country for work or pleasure.
Bloomberg Intelligence further fleshes out the finding, noting that 92% of China's consumers are planning an overseas trip in the near future, while 95% of them intend to travel domestically within the next three months.
And Tencent? Its video games, fintech services, and instant messaging platforms never really fell out of favor. Indeed, if anything, China's consumers leaned on these digital offerings even more in the middle of pandemic-prompted lockdowns.
If the country's economy starts humming again, however, business like its digital marketing service and its artificial intelligence solutions could experience growing demand. To this end, the company made a point of pointing out with last quarter's official report that revenue is (finally) growing again thanks to improved demand for digital advertising.
As for Alibaba, it's nearing a breakup into several distinct operating entities at the same time its founder and former CEO moves back into the picture.
While arguably once better together, the collective organization has become so complex that splitting up its operating arms will likely unlock value. In the meantime, the company is prepping its own AI-powered conversational tool akin to ChatGPT.
Perhaps most important of all, however, is that Alibaba's flagship online mall is also a direct beneficiary of a consumer-led economic revival in China. That's especially true following last week's addition of a new budget-minded section of its e-commerce platform, which should appeal to Chinese consumers still worried about the condition of the domestic economy. Indeed, its growth is driving most of this year's projected top-line growth of 7%, and that company-wide growth pace is expected to accelerate to more than 10% next year.
Look beyond these company-specific and industry-specific numbers, though, and focus on the bigger-picture story they're telling as a whole: China's on the mend.
No real risk means no real reward
You still want to wait until all of these green shoots of growth solidify into something more concrete? No problem. However, since stocks tend to move with the future in mind rather than the past (or even the present), waiting could prove to be a costly missed opportunity.
Just remember Gretzky's brilliant advice: You want to skate to where the puck is going to be rather than where it has been. That requires a little bit of faith, as well as a lot of willingness to read the subtle cues before they become overtly obvious.
