By Steven M. Sears
China is a great investment -- if you don't look at the past too closely.
Just forget about Jack Ma, the founder of Alibaba Group Holding, and ignore the concerns voiced over the past decade that no one has made money investing in China. Instead, focus on recent dramatic market pops, like Monday's 8.5% rally, which the pundits celebrated as the biggest daily move since 2008.
If you ignore the inconvenient facts, buying stocks and bullish call options and selling put options on China themes is attractive because China's leaders will likely keep stimulating the economy.
If only it were that easy.
Consider the fate of Ma, a former teacher. His e-commerce company was long the preferred way to monetize the growth of China's middle class -- and, for a while, a favorite of this column. And then Ma made a crucial mistake: He criticized China's leaders. He soon disappeared. Literally. Some thought he was imprisoned, or even executed. Alibaba's stock price suffered, with its U.S.-listed shares falling from a high around $317 to $63. They were recently trading at $109, after Alibaba moved its primary listing to Hong Kong from New York.
Ma ultimately resurfaced, but he and Alibaba can serve as parables for investing in China -- the latest reminders that its leaders have for thousands of years patiently taken from the outside world that which was useful to China. Everything else has been discarded.
The market mob, of course, lacks perspective, and it likes easy, market-friendly facts like low interest rates and easy bank capital requirements. Anything that generates liquidity and encourages speculation with fast, easy money is good.
Wall Street understands its customers. Event calendars are circulating across the Street to remind investors that they need to stay invested lest they miss new opportunities for China to make announcements that will dazzle global investors.
To be fair, the China trade is likely an easy moneymaker for at least a few months. The reason is as ancient as China.
Money is like water. It flows to the lowest point, which China seemingly wants to be. This should keep money flowing into China and into Western proxies for China, such as exchange-traded funds like iShares China Large-Cap and Xtrackers Harvest CSI 300 China A-Shares, and stocks like PDD Holdings. Alibaba shares might even benefit.
Yet there is an unfortunate fact: China's leaders are unreliable counterparties. Unlike U.S. politicians, China's Communist leaders don't seem scared of the bond market or the brutal power of the financial system. Some will argue China needs the markets to expand its middle class to pay for caring for a rapidly aging population. The reasoning makes sense but could prove misleading. Hence, ignoring China is probably prudent until the leadership establishes a record as a reliable counterparty. That could take decades.
If you want free money, and a margin of safety, sell cash-secured puts on the Utilities Select Sector SPDR ETF (ticker: XLU). "Free money" is a bold assertion, but data centers and artificial-intelligence networks are useless without electricity. Utility stocks are in demand, and utility executives have long histories as reliable counterparties.
With the ETF at $81.43, the November $79 put could be sold for about $1.08. If it is above the put strike price at expiration, the premium is kept. If the ETF is below $79, investors must buy it or adjust the put to avoid assignment.
Analyzing U.S. power plants is less exciting than traipsing through Beijing or Shanghai on an investment trip, but utilities might prove more profitable than chasing whatever baubles China's leaders dangle before investors.
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(END) Dow Jones Newswires
October 04, 2024 21:30 ET (01:30 GMT)
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