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Thursday, November 1, 2018

Why investors are wrong about the trade war with China

The Shanghai Composite Index has plunged more than 20% so far this year and is nearly 30% below its 52-week high.
But major Chinese tech companies may be getting unfairly punished by investors.
China's tech giants generate a big chunk of their sales and profits from Chinese consumers and companies, and aren't impacted by tariffs in the same way as Chinese financial and industrial companies.

Chinese consumers still healthy

Tina Byles Williams, the CEO and chief investment officer of asset management firm FIS Group, said pullbacks in Alibaba (BABA), Baidu (BIDU), Tencent (TCEHY) and Sunny Optical (SNPTF), a maker of camera lenses used by major Chinese smartphone makers Huawei, Xiaomi, Oppo and Vivo, are a bit excessive.
"China will see some challenges but we do think the extreme level of selling is probably overdone," Williams told CNN Business.
US strikes at the heart of China's tech ambitions with chipmaker ban
Byles thinks Chinese healthcare companies are also being unfairly punished for much the same reason: They focus on Chinese consumers.
She dubs the tech and healthcare companies "New China" stocks.
Still, Williams said investors probably should stick to China ETFs as opposed to individual stocks in order to minimize risks.
Her firm owns both the KraneShares MSCI All China Health Care (KURE) and the KraneShares CSI China Internet (KWEB) ETFs. The iShares MSCI China ETF (MCHI) also owns big positions in leading Chinese tech and firms.
Credit ratings agency Moody's is also upbeat about domestic-oriented Chinese companies, which won't suffer under more tariffs from the Trump administration.
Moody's cited smartphone audio components maker AAC Technologies (AACAY) and Alibaba rivals JD.com (JD) and Vipshop (VIPS) as examples of companies that should hold up well.
But just how healthy is the Chinese consumer?
Investors will get a better sense of that when Alibaba reports earnings Friday morning. Analysts expect sales to increase more than 55% from a year ago - a sign that Chinese consumers are still spending even in face of a slowing economy.
Alibaba executive chairman Jack Ma this week acknowledged the trade problems in his annual letter to shareholders.
"Recently, the global economy has found itself in a state of turmoil. Uncertainties abound in trade relations, consumer trends, stock markets and the manufacturing industry. US-China trade tensions create increased risk of instability," Ma wrote.
But he remained hopeful that Alibaba will remain a global tech leader in spite of the geopolitical problems, saying that "Alibaba is well-positioned because we are adept at weathering adversity."
"This is the third time in Alibaba's 19-year history that we have encountered a setback in the global economy. But our past experience tells us there are huge opportunities behind the anxiety and friction," he wrote.

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