Grudge Match: Why China Is My Top Pick for 2022

Toward the start of 2021, I made what looked like a really promising investment.

It was in a wildly popular music streaming product in a high-growth region. One that sustains north of 600 million users, with the paying cohort of them (42.7 million) growing by 50% YoY at the time.

This was Tencent Music Entertainment (TME), effectively the Spotify of China.

My thinking was TME could probably, eventually, capture the same kind of paying userbase as Spotify does (172 million today). This shouldn’t be too big an obstacle for a fast-growing country with a 1.4 billion population.

It’s also controlled by Tencent, a ubiquitous Chinese media and communications platform.

Just seemed like one of those no-brainer trades…

After I heard about it, I decided to watch it before I bought in. And I watched it climb close to 30% all the way through February before saying “screw it” and finally taking the plunge on March 24.

I should’ve waited a few more days… Because what followed was the beginning of my worst equity loss to date.

Blow-up, Bleed-out

At around the exact same time, an investor by the name of Bill Hwang was up to no good.

Hwang had levered up a little too hard, especially on Chinese tech companies, and got cornered by the February scaries.

Just 3 days after I bought TME on March 27, Hwang’s Archegos Capital was forced to unwind $20 billion in leveraged stock positions — most of his net worth at the time — losing all of it.

This (amid other factors we’ll get into) sent the Chinese tech sector — using the PGJ as a proxy here — down 46% since Hwang’s Archegos Capital defaulted. TME has fared even worse, falling 81%.

I added to my TME position the entire way down, thinking that it had to turn around.

Every time, I was too early.

Because soon, China began cracking down on its tech sector. Everyone from Alibaba, to Didi, to Ant Group, to Tencent faced the wrath of the Chinese Communist Party (CCP) over concerns about data security and wealth distribution.

TME even got its own knock, when the CCP halted its music licensing business.

Then further cracks appeared with the Evergrande default, which rattled investors’ confidence in China further still.

To put it bluntly, my position in TME was a disaster. My worst capital loss to date, in any trade. (I just sold all my shares for tax-loss harvesting purposes, which will help on my tax bill this year, so at least it wasn’t a total wash.)

You would think I’d have a grudge with what happened this past year in the Chinese markets, and would vow to never trade China again.

But to the contrary, I believe the last year’s sell-off has provided the biggest bargains on growth stocks in the entire global stock market.

And it has me highly bullish on China… not just in 2022, but beyond.

Why I’m Bullish on China, of All Things

Much has been said about the risk in investing in Chinese companies. The CCP has a degree of influence over how its private industry operates that Americans cannot even begin to comprehend.

This can often be to a company’s detriment, on the micro level. If a business isn’t complying with the CCP’s ever-evolving guidelines, the punishment is swift and severe. Companies are made examples of in China.

Evergrande is the prime example of this. Seemingly in an effort to root out the worst actors in China’s real estate sector, the CCP introduced laws that one of its biggest real estate debtors could not follow, causing them to default.

In America, if the government introduced rules that outright destroyed one of its biggest businesses, we’d call it a gross overstep of government power. In China, it’s just a way of dealing with bad behavior before it’s normalized.

Look, there are lots of reasons not to agree with China on principle. It is an unapologetically communist regime that wields virtually limitless control over its capital markets and citizens. It’s not at all what I want for the society we live in.

But I also have to remind myself that China is a different country. I can’t compare my world to theirs, and vice versa. It isn’t un-investable simply because it does things differently.

And the fact is, China is growing much faster than the U.S. in several key aspects — namely its technology sector.

And at current valuations, I think it’s too good to pass up.

China Tech Is Too Cheap to Ignore

The Chinese stock market lagged its global peers by 37% in 2021, the biggest gap since 1998. China got freakin’ smacked this year. And what confuses most investors is China did the smacking.

Tencent (TCHEY), the de facto telecom and media center of China, fell over 41% from its peak. Close to half a trillion dollars, wiped out. This was mainly due to new antitrust rules imposed on Tencent and other Chinese internet companies.

Alibaba (BABA), a Chinese ecommerce giant the likes of Amazon, has lost 56% of its value, over $300 billion. This comes after the Chinese government intervened over alleged monopolistic practices.

DiDi (DIDI) was straight-up delisted from U.S. exchanges 4 weeks ago after months of nudging by the CCP. Regulators were apparently concerned about the company’s data protection practices, especially its cross-border operations.

This all comes while the U.S. stock market put in continual all-time highs through 2021.

There are two ways to look at this dynamic. One, that the CCP is actively sabotaging its own industry for… some reason.

Or two, that it’s intervening early on contagions it sees spreading throughout its markets — not as a saboteur but as a vaccine.

In my view, with how quickly these massive companies got cut in half in such short a time, the risk/reward points me to thinking the latter.

I like China as a speculation in 2022. I think the big Chinese tech names will outpace their Western counterparts, as the CCP begins to ease its regulations — its point having been made — and we’ll see big capital begin to flow back in to snap up deals.

The companies I’ve mentioned today — Tencent, Alibaba, Ant Group, Tencent Music, Didi — have hardly flatlined in 2021. These companies are generally growing and thriving despite severe government intervention. That tells me they’re on sale.

And if you love U.S. tech for 2022, you almost have to love China tech even more.

You Don’t Have to Be an Expert to Make Big Gains

With all of this said — I want you to remember I’m not an expert like Mike or Chad.

I’ve made most of my money being right on big trends, namely cryptocurrency, and sitting on my hands.

When I saw in 2016 that there was a cryptocurrency that promised far greater utility than bitcoin while maintaining decentralization, I decided I would put in a small grubstake of $500 with a 10-year time horizon.

Six years in, that grubstake turned into nearly a quarter-million dollars at the peak in November. We’ll see where we’re at by 2026.

I include this bit of brief peacocking to explain that I’m not completely devoid of investing skill. And that you don’t have to be an expert to make big gains!

I’m a long-term investor. Heck, I’m a long-term speculator.

I may not have been right on China in 2021. I may not be right in 2022 either.

But I’m confident in the coming years, this trade will pay off in a big, big way.

Best,