Sometimes I think we’ve all seen too many apocalyptic movies about global pandemics.
Make no mistake, the Wuhan coronavirus outbreak is bad news.
For those who have lost loved ones to it, it’s a tragedy.
For many investors, it’s a source of major concern.
In addition to the impact on global travel, the Chinese provinces on virus lockdown account for almost 70% of China’s gross domestic product.
That means we should all be bearish on Chinese stocks, right? After all, the Shanghai stock exchange opened on Monday with a 9% drop.
Not so fast.
Instead of panicking, let’s take a step back and see what’s happening.
That way, you won’t miss one of the best opportunities you’ll ever see from this massive economy.
The Chinese Are Smart and Tough
Here are two reasons why I believe that.
First, the Chinese are resourceful and determined.
For example, many Westerners assume that Chinese domestic economic activity has ground to a halt.
But that’s simply not true. It’s just shifted online.
China’s State Post Bureau reports that 78.17 million packages were delivered during the last week of January … a 110.34% increase from the same time last year.
The Chinese press are full of articles about delivery drivers innovating unique ways to do their jobs without putting themselves or their customers at risk. Even though some of this is surely propaganda, it’s hard not to admire their commitment.
Second, hundreds of millions of Chinese stuck at home are communicating and playing with each other online. China’s internet industry was already massive. Now it’s growing exponentially.
In fact, last week, over half a billion players logged on to one of China’s most popular online games. That’s about 150% the size of the U.S. population.
But they don’t just do it to entertain themselves … the gaming platform is integrated with an instant chat app that allows them to connect with friends and relatives around the country.
And that just shows how China’s online commercial, social and entertainment ecosystem is so much more advanced than our own…
Sometimes It’s Better to Be Second
U.S. companies like Facebook and Google innovated new products that took the world by storm.
But because they’ve been so focused on building those platforms into monopolies and milking them for excess profits, they’ve been slow to integrate them with others, like instant messaging and fintech. Case in point? Facebook’s failed launch of its libra cryptocurrency.
Easy money has made them lazy.
Not so for the Chinese. Sure, they’ve shamelessly copied many things U.S. companies developed. But they’ve done some clever innovation themselves, by stitching the different pieces of the online world together.
For example, both Google and Facebook overwhelmingly rely on revenue from advertising for their profits. Their “innovation” is focused on trying to squeeze out the competition and make their advertising even more invasive than it already is.
By contrast, Chinese internet giants such as Alibaba, Tencent and Baidu have developed an array of products and apps so that the profit from those business lines goes to them … not just advertising revenue.
And, just as every cloud has a silver lining, the Wuhan virus is rapidly turning sentiment bullish towards Chinese internet stocks. Just look at the big jump in the main Chinese internet exchange-traded fund (ETF) on Monday this week:
Get ’Em While They’re Cheap
There’s no telling how long the Wuhan virus epidemic will last. If the 2003 SARS outbreak is any guide, it should last for two to three quarters.
The Chinese economy suffered a big drop during the SARS crisis. Then it rebounded strongly.
But there’s a big difference between the Chinese economy of 2003 and that of 2020.
In 2003, the Chinese internet was just beginning. Roughly 6% of its population was online. Today, more than 61% is on the internet. It’s an immense and all-encompassing network of platforms, all of which remain available and incredibly useful — essential, even — to Chinese people sheltering from the Wuhan virus.
My recommendation is to buy the KraneShares CSI China Internet ETF (NYSE: KWEB) right now. It holds all the ones mentioned above and more. As the coronavirus keeps more and more Chinese people online, look for this ETF to appreciate steadily over the next few months. And when the crisis subsides, it’s going to ride along with the rest of the Chinese stock market as it recovers.
So by all means, be concerned about the Wuhan virus. Just don’t let it stop you from grabbing an opportunity for profit.
Kind regards,
Editor, The Bauman Letter
