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Alibaba Stock Is a Little Too Hot for Comfort

Josh Enomoto

For over a year-and-a-half, one of the biggest concerns for the markets and the global economy was (and technically still is) the U.S.-China trade war. One only needs to look at the price chart of Alibaba Group (NYSE:BABA) shares for confirmation. Since the beginning of October, Alibaba stock has gained nearly 29%.

Alipay is Just Another Point of Contention for Alibaba Stock Investors
Alipay is Just Another Point of Contention for Alibaba Stock Investors

Source: zhu difeng / Shutterstock.com

Naturally, other Chinese stocks, such as JD.com (NASDAQ:JD) and Tencent (OTCMKTS:TCEHY) have experienced dramatic bullish sentiment. Due to the escalating war of words and later, the punitive tariffs, the trade war at one point seemed to have no end. While it hurt U.S. economic interests, the dispute also exposed the vulnerability of investments like BABA stock.

Yes, China has emerged into the global stage, becoming the world’s second-biggest economy. According to sobering data from Standard Chartered, China could eclipse the U.S. at the top spot. If that wasn’t bad enough, the U.S., according to this forecast, will never regain its throne. Initially, this augurs well for Alibaba stock and its ilk.

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However, China depends not just on its exporting machinery but also its other industries, such as manufacturing. As the Asian juggernaut learned, trade wars don’t necessarily have clear winners and losers. Instead, both or all parties involved could experience negative economic impacts.

Therefore, the thawing in U.S.-China relations was vital for BABA stock, if only to instill confidence back among investors. Even better, China’s top negotiator agreed to meet with U.S. delegates. Insiders suggest that a “phase one” deal will be signed in the first week of January. If so, that could spark another leg up in Alibaba stock.

But with shares having jumped so quickly, does Alibaba Group still have legs to run?

Questions Still Linger about Alibaba Stock

If the trade negotiations move beyond phase one toward more substantive deals, obviously, this puts BABA stock in an enviable position. And should negotiations continue to progress positively, most Chinese investments will likely move higher.

Furthermore, our own political environment suggests that the bull case for Alibaba stock remains strong. Primarily, we’re entering a critical election year. At the latest count, President Donald Trump’s approval rating has increased to 50%. This indicates that he’s winning back support from swing voters and is positioned slightly advantageously relative to Democratic frontrunners.

As the last election cycle proved, give Trump even a small chance of victory and he’ll deliver. But what absolutely won’t get Trump reelected is if the economy tanks. Or, if he implements policies that hurt American workers, the voters will not be kind to him.

Therefore, you can see how the red carpet is rolling out for Alibaba stock. Nevertheless, investors should exercise vigilance.

First, China was not uninjured during the heated moments of the trade war. In fact, the country lost millions of jobs. And export data demonstrates that the Chinese economic machinery was already slowing well before Trump took office. That means the trade dispute exacerbated problems that already existed.

China exported value goods
China exported value goods


Click to Enlarge
Source: Chart by Josh Enomoto

Since Alibaba stock is levered largely to discretionary spending (e-commerce), a hurting labor force isn’t exactly helpful.

Second, while China’s propaganda machine screamed loudly during the trade war, their economic data is probably worse than they’re letting on. Asia Times recently investigated the issue of fake numbers in China’s economic metrics. Interestingly, even BABA stock is not a true equity stake but rather, a stake in a Cayman Islands holding company.

This adds uncertainty to an overheated stock that you wouldn’t normally get anywhere else.

Fuzzy Forecast for BABA Stock

Because Alibaba stock is tied to Chinese consumer confidence, I’m not gung-ho on the opportunity. If things go awry during the trade negotiations, shares could once again find themselves on a downward trek.

As I mentioned above, Trump will do anything to keep the economy moving, at least in 2020. At the same time, he can’t afford to look weak against China. Regarding the Asian country’s record on human rights violations, both Republicans and Democrats agree: China must be held accountable.

In other words, just caving to China to get a trade deal signed is not an answer. If Trump goes that route, he’ll be looking for another job come January 2021.

Thus, the bottom line is that BABA stock is a tricky animal. Considering that shares have jumped so much, investors are probably best served waiting for a discount. Despite a potential phase one deal, there are many questions that yet to be answered.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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