Why Chinese Tech Stocks Like Alibaba Crushed It on Monday
The start of a new trading week was quite the boon for established Chinese tech stocks. A respite -- perhaps even a reversal -- in the recent trade conflict with the U.S. resulted in a surge of bullishness for the sector, and a host of known titles saw encouraging price boosts.
Among these were Alibaba Group (NYSE: BABA), which notched a nearly 6% gain on the day. The more specialized Tencent Holdings (OTC: TCEHY) and JD.com (NASDAQ: JD) didn't quite reach that height, but still enjoyed notable gains, rising by nearly 3% and almost 5%, respectively.
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Notable exemptions
Some of the most dramatic equity price movements in recent times have been related to the trade war, and that trend was in full effect on Monday.
Over the weekend, President Trump announced another series of exemptions to his announced tariffs; these covered a wide range of tech goods, including semiconductors, flash drives, TV displays, and smartphones (hence the market-beating pop of Apple stock on Monday).
Alibaba, Tencent, and JD.com all run businesses that are service-oriented, so in theory, none of the exemptions directly and profoundly benefited them. However, a rising tide benefits all boats, so what's seen as being good for component makers is advantageous to other techies too.
To be clear, this doesn't mean all Chinese tech companies are off the hook entirely. The ones that manufacture goods in the 20 product categories covered by the new exemptions are still subject to a general 20% tariff on goods imported to the U.S. from that country. But that's a great deal lighter than the originally imposed 145%.
Additionally, the motivation behind the exemptions wasn't to give such companies a permanent break. It was apparently granted to give Chinese tech component manufacturers time to set up operations in the U.S. That's one of the main, stated goals of the tariffs in the first place: to rebuild America's once-considerable manufacturing base.
In the wake of the announcement, Trump's deputy press secretary Kush Desai claimed, "At the direction of the President, these companies are hustling to onshore their manufacturing in the United States as soon as possible."
A mighty effort
Tellingly, Chinese tech manufacturers didn't rush to put out statements asserting that they would do so. The country's government seems to feel, somewhat justifiably, that it has a strong hand in the current conflict. Perhaps it even believes it can ride out the storm.
Judging by their collective reaction, investors feel the same way. Like other corners of the manufacturing industry, much of the hardware made by the tech industry has been crafted abroad for many years.
The original (and key) motivation was costs, of course, and this will be a major factor in how the trade conflict plays out. On the U.S. side, the hope appears to be that a wide range of industries can suddenly and effectively either bring their manufacturing operations back into this country, or even establish them for the first time.
Yet this is an expensive and complex undertaking, even at the best of times, and even for the most powerful and well-capitalized businesses. Incentives also help a great deal, and we've seen numerous examples of ambitious countries luring manufacturers with sweeteners such as tax breaks. None seem to be on the table at all in America's current effort.
Is the trade war waning?
At this point, I'd be inclined to run with the bulls here. The current presidential administration has proven to be flexible, at times surprisingly so, with its granting of exemptions and breaks. The tech one is a major concession, and I think the industry is powerful and influential enough to eventually make it more than temporary.
The story of this trade conflict is far from over, but the ending could very well be a happy one for major players in the sector, particularly those based in China.
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Eric Volkman has positions in Apple. The Motley Fool has positions in and recommends Apple and Tencent. The Motley Fool recommends Alibaba Group and JD.com. The Motley Fool has a disclosure policy.
