China stocks and China-related stocks fell back to earth after a huge run-up over the past month.
Shares of Chinese stocks PDD Holdings (PDD -5.75%) and GDS Holdings (GDS -6.46%), as well as European luxury brand giant LVMH Moët Hennessy (LVMUY -2.94%), sold off today, down 6.2%, 6.8%, and 3.1%, respectively, as of 1:15 p.m. ET.
The across-the-board sell-off in Chinese and China-exposed stocks like LVMH came on the heels of disappointing news regarding hoped-for Chinese stimulus measures. Moreover, a new tariff on imported brandy from the European Union didn’t help.
Big hopes lead to a letdown after a massive run
Chinese stocks have surged over the past month, with PDD Holdings up 55% over the past month and GDS Holdings up 21%, even counting today’s sell-off. LVMH’s 5.6% gain, while paltry compared to domestic China names, is still a hefty one-month return for any stock.
PDD Holdings has become one of the major e-commerce platforms in China with market-leading growth, while GDS Holdings is one of the largest data center operators in the country. Both would be aided by a stronger Chinese consumer and economy, and GDS, as a somewhat capital-intensive business, would especially benefit from lower interest rates. LVMH, like most luxury brands, has a big exposure to China, with 30% of its sales coming from east Asia last year, the bulk of that being China. This is why these stocks have catapulted off of very low valuations following last month’s interest rate cuts and promises of fiscal stimulus by Chinese authorities.
However, today investors sold the rally, as China’s top economic planning agency, the National Development and Reform Commission, did not specify a specific economic stimulus package some investors were expecting. Reform Commission Chairman Zheng Shanjie did say that the commission would “support growth,” but the lack of specificity may have troubled investors hoping for more. After all, it has been several years of low growth and recessionary conditions in China, and the government had, up until recently, been reluctant to roll out aggressive stimulus. Therefore, the lack of details may have injected some fear that officials might not follow through on stimulus measures that were highly anticipated following last month’s commentary from the Politburo.
On top of the lack of stimulus clarity, Chinese authorities also said today that the country would impose tariffs on European brandy imports in amounts between 30.6% and 39%. The move is apparently in retaliation to new tariffs the E.U. imposed on Chinese-made electric vehicles just a few days ago. That has the potential to directly harm LVMH’s sales to China. LVMH’s wines and spirits segment garnered 2.8 billion euros in sales in the first half of 2024, or just under 7% of its overall sales.
Will the China trade fizzle out?
Very smart investors are divided on the China trade right now, and we can see that in the extreme volatility in Chinese stocks both to the upside and the downside in recent weeks.
On the one hand, Chinese stocks and China-exposed stocks mostly trade at low valuations, following a few years of basically recessionary conditions after the government imposed “zero-COVID” lockdowns, took a heavy hand in regulating big tech companies, and pricked the country’s property bubble. So, if the government is really changing its tune, that could lead to a big recovery.
However, over the medium and long term, if the same bureaucrats are still running the Communist Party, it is hard to get a lot of confidence that the government will follow through, relax regulations in a more permanent manner, and improve its geopolitical relationships.
Today’s hesitation in unleashing a massive stimulus and the return of tit-for-tat tariffs with other global players seems to have reminded the bulls of these ongoing risks.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.