If any company reflects the state of China’s economy, it would be e-commerce and cloud-computing firm Alibaba (NYSE:BABA). Perhaps Alibaba stock is a bullish bet on China’s economic recovery, just as much as a wager on Alibaba as a company. In that light, there are definite risks to investing in Alibaba, though there are also potential rewards.
As I’ve previously discussed, Alibaba is very reasonably valued and offers some portfolio exposure to generative artificial intelligence. I’m not against investing in Alibaba for the long term. Today, however, I’m suggesting keeping your Alibaba share position small, if you choose to take a position at all.
Alibaba and China’s Uneven Recovery
I’m not suggesting one stock represents the entirety of China’s economy. However, if you own Alibaba stock, and perhaps also add some Baidu (NASDAQ:BIDU), Tencent (OTCMKTS:TCEHY) and Nio (NYSE:NIO) stock, you’ll practically have a do-it-yourself China exchange-traded fund.
The Covid-19 pandemic and supply-chain constraints have caused ongoing problems for each of these China-based businesses. Certainly, China’s uneven recovery has weighed on Alibaba’s financial results. Alibaba founder Jack Ma remains confident; he assured, “We are starting to operate on the diseases of a big company.”
That’s all fine and well, but Alibaba and other technology-focused China-based businesses have to contend with governmental interference. Remember, if you own Alibaba stock as a proxy for China’s economy, then your portfolio will be exposed to China’s problems.
Among those problems is China President Xi Jinping’s crackdown on the nation’s biggest businesses. Beijing’s (i.e., the Chinese government’s) restrictive policies have weighed heavily on companies like Alibaba, Nio and Tencent.
Good News and Bad News From China
On the economic front, there’s good news and bad news for China and, by extension, for Alibaba. The good news is that China’s first-quarter 2024 gross domestic product (GDP) increased 5.3% year over year. Economists had only expected China’s GDP to grow 4.5% YOY.
However, Beijing could introduce new, restrictive policies at any given moment. Furthermore, not all of the data from China is positive. For example, China’s industrial output increased 4.5% YOY in March, while economists had expected 5.5% growth.
China’s retail sales grew 3.1% YOY in March, and this result fell short of the economists’ prediction of 4.5% growth.
Zichun Huang, an economist with Capital Economics, concluded that China’s economic recovery “clearly remains fragile.”
Going forward, Alibaba’s investors will need to closely monitor the ongoing developments in China. It won’t be enough to just study Alibaba’s earnings reports; I wish it could be as simple as that, but it’s not.
Alibaba Stock: Consider Your Position Sizing
I’m not trying to dissuade you from investing in Alibaba. It’s a huge, famous company, and Ma’s confidence should provide some encouragement.
On the other hand, China’s problems will also be Alibaba’s problems. If Beijing inhibits the country’s economic growth, Alibaba and its stakeholders will have major problems.
Sensible investors should understand the political/macroeconomic risks and only own a few shares of Alibaba stock. If you’re not prepared to conduct your due diligence on China’s economy, you don’t have to invest in Alibaba at all.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.