In every market, there are markers and yardsticks - or benchmarks as they like to call them - that attract investment dollars in and out of specific vehicles and asset classes. Focusing on stocks today, you will learn where a few yardsticks are moving and how investors like Ray Dalio have gotten a headstart on what could be the rally of the year.
Starting with the credit cycle, everyone knows - or should know by now - that interest rates and money markets typically drive stocks higher or lower, so repeat this to yourself every night before bed: rates up, stocks down, rates down, stocks up. In the United States, the FED is looking to cut rates in 2024, making a bullish case for the market. However, there are even stronger bullish signals across the world.
You see, the way the Chinese market is behaving today could soon trigger a buying spree like none other. For reasons you will learn in a bit, a buy signal that hasn't flashed since 2005 is now a screaming buy for stocks like Alibaba Group (NYSE: BABA) and JD.com (NASDAQ: JD), and maybe even the reason why Dalio is buying into ETFs like the iShares MSCI China ETF (NASDAQ: MCHI).
Mechanics first
So, look, when interest rates move, the first market that will pivot is the bond market, and you can see the direct impact by following instruments like the U.S. ten-year government bond yield. Here's a quick example of how powerful of a driver this benchmark can be:
In the past quarter, Simon Property Group (NYSE: SPG) was a stock trading cheaply with its 7.5% dividend yield. That's a good yield, but is it better than the next best thing? During that time, the ten-year was offering a yield of roughly 5.0%, making Simon Property an attractive purchase.
By the time markets found this opportunity and began buying into the stock, its price rose from roughly $105.0 a share to $150.2; that's a 43.0% rally! All because the yield offered was attractive enough within a high bond yield environment. Now, where else can you find an attractive setup like this? You'll be shocked.
In China, the CSI 300 stock market index has been so heavily disregarded by investors worldwide that its cheapness has created a similar dynamic to Simon Property. Only this time, you are talking about an ETF carrying dozens of stocks and diversified risk.
What's the yield? Try 8.0%. While you cannot directly trade this index, you can see a similar development in the iShares China ETF, which is paying out a 2.7% dividend yield today, its highest since 2014. However, the CSI yield means nothing without knowing where the bonds are; ten-year Chinese bonds stand at a 2.5% yield today.
Does this sound familiar? With the stock index giving you 8.0% and bond yields giving you 2.5%, Simon Property's spread looks like an appetizer compared to this giant entree of an opportunity.
How much longer?
Taking the spread between these two yields, 8.0% minus 2.5%, you will see a level of 5.5% as a difference between the two. According to Bloomberg Intelligence, this hasn't happened since 2005-2007, when the United States market became shaky during the housing crisis; guess where investors found the next set of attractive stocks?
That's right, investors poured all over the stock in the CSI index, sending that index higher by 156% in the following years. Could history repeat itself? Only if investors accept that China stocks are among the most undervalued names in the market today, but you still need a spark to light the fire.
That spark will likely come from confirmation of a recovering economy and company earnings. In case you missed it, PDD (NASDAQ: PDD) posted triple-digit jumps in its financials during the past quarter, showing that the Chinese consumer is ready to return after multi-year lockdowns.
Now, the first wave of a more optimistic viewpoint toward the nation's equities will likely hit blue-chip names first. This is why Barron's, in its 2024 stock picks list, added Alibaba among the first in the group leaning toward value and earnings expansion.
If you've been following MarketBeat for a while, you would have been aware of this coming pivot after hearing about Ray Dalio's initial buying into China. If you are new here, then there is still time to dig into the logic behind this opportunity; it could prove to be the easiest decision for your portfolio in 2024.
Analysts see a price target of $129.2 for Alibaba, which calls for a net 77.0% upside from today's prices, a good way to start loading up the year. For the second most-followed stock, JD.com, a $44.6 price target slaps a potential rally of 67.1% in that name.
