Those losses are pedestrian compared to the bloodbath in shares of Chinese private education companies, which have cratered 70% in the past week after news broke that the Chinese government may limit the firms’ profitability or force them to become nonprofits.
In light of these dramatic declines, what should investors do?
Buy the dip, says Ryan Cullen, CEO of Cullen Investment Group.
“There’s a little bit of overreaction by investors in terms of hearing the news from China, like, ‘Oh, they want [them] to become nonprofits,'” Cullen said. “That won’t happen.”
China has a history of following through on antitrust threats. The nation slapped Alibaba (BABA) with a record $2.8 billion fine in April after a months-long investigation into practices of Ant Group, Alibaba’s data-hungry financial technology subsidiary. In July, China crippled ride-sharing provider Didi Global (DIDI) by removing its app from stores, and shares fell 35%.
China’s private education sector is now under attack in part because the nation hopes to boost its birth rate by limiting the cost of raising children. That’s a stunning reversal from the one-child mandate the government enforced from 1980 to 2015. China relaxed its two-child policy earlier this year, and now allows couples to have up to three kids.
But even if beaten-down Chinese education companies like New Oriental Education Group (EDU), TAL Education Group (TAL), and Youdao (DAO) see business dry up in China, their overseas operations can keep them afloat, Cullen said. He said he’s buying shares of all three at current levels.
Outside of the education sector, Cullen is broadly bullish on Chinese stocks, which make up about 20% of his portfolio. He said the Chinese market is too big to ignore and is bound for robust growth as it becomes less export-dependent.
China, the world’s second-largest economy by GDP, accounted for 41% of all global growth in 2019, according to Matthews Asia, and was the only major economy to expand in 2020 despite the pandemic. Cullen noted that Matthews Asia expects the nation’s growth through 2024 to be nearly as much as the US and Europe combined.
Regulatory concerns are an issue, Cullen admits, but he notes that the total market cap of Chinese stocks was $14.1 trillion entering the year, nearly double that of European stocks at $7.8 trillion.
“Does it really make sense to avoid a market that is roughly twice the size of the Eurozone?” Cullen said. “Because doing so would effectively be an enormously bearish bet on the world’s second-largest economy.”