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What The Markets Are Pricing In & China's Winning Election Stock

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Following 4 consecutive days of 1%+ returns, the public equity markets are taking a breather. 2020's election week turned out to be the controversial debacle that we all anticipated, but the veil of ambiguity is beginning to fall.

The markets have reacted positively to the preliminary results that point to a divided government with Biden & Kamala in office, Republicans holding Senate, and the Democrats maintaining House control.

Still, votes aren't all in, and the Trump campaign has already begun its contention with lawsuits being filing against states vote-counting systems. I don't think it's likely that these lawsuits will have a material impact on the election outcome, and the markets are pricing this in.

What We Know

Despite the still marginal level of uncertainty, the markets feel confident about the election results. With more certainty about the next 4 years of policy, cash-heavy investors are starting to put their money back to work this week.

There was some concern about what a 'Blue Wave' would mean for equities with corporate and capital gains tax hikes that would likely have led to an end of year sell-off. Now that these tax concerns have larger subsided.

The VIX, aka the fear gauge, has plummeted over 36% since the peak of election fears last Friday.

I see China as a big winner of this election if Biden can secure the Oval Office. The China-US trade deal was ostensibly the crown jewel of the Trump administration's time in office, and the President was not settling in negotiations with Xi. Biden's regime can't back down for this trade war with the ball already rolling, but I expect him to be more compromising in order to come to a swift and conclusive trade deal.

China is rapidly recovering from the pandemic, and it's not experiencing a second wave like the rest of the world. Digitalization in this country is proliferating, and opportunity in tech is ripe.

The BABA Opportunity 

Opportunity domestically is beginning to dry up as stocks bounce back towards all-time highs with valuations sitting at very rich levels. But there one Chinese stock that I would not hesitate to pull the trigger on today.

Alibaba (BABA - Free Report) shares felt some pain this past week, which opened up an excellent buying opportunity for the online leader in one of the most rapidly digitalizing economies in the world.

 BABA dipped 8% on Tuesday following its affiliated fintech group, Ant Financial, suspending what was expected to be the largest IPO in history because of abrupt regulatory changes in China that appear to be aimed at Ant's microloan business.

After a marginal recovery on Wednesday, BABA stumbled again yesterday, retesting its $280 support level. Today the stock is soaring back towards $300.

Alibaba owns 33% of Ant Group, China's fintech trailblazer, and the company's shares had been lifted by the overzealous demand for Ant's pre-IPO shares. This Ant-focused regulatory shift could throw a wrench in Ant's valuation perception and, in turn, BABA (at least in the immediate future). Still, I see this as a short-term hiccup that will not impact materially impact either business in the long-run.

Ant represents around $40 of every BABA share (at the anticipated IPO valuation of $316 billion), and its continued growth strengthens Alibaba's already firm grip on the rapidly digitalizing Chinese economy.

Alibaba has a cornucopia of digital products at its disposal, and it will use all of them to control and profit off the prolific digitalization occurring in Asia today.

The fact that the Amazon (AMZN - Free Report) of the East (aka BABA) has not seen the same valuation push as its western counterpart is baffling. Alibaba controls the e-commerce space (80% market share), the cloud-computing category (roughly 50% market share), and a 33% stake in the leading FinTech in the most populous and soon-to-be largest economy on earth.

Alibaba is valued at less than half of Amazon despite producing substantially wider margins, greater profitability, and having a more extensive revenue growth outlook for the next couple of years.

This stock still has a massive amount of upside potential, just waiting to be priced in. The Chinese economy is beginning the recover past pre-COVID growth rates, with Alibaba's digital technology being the centerpiece to this expansion.

BABA busted through its 50-day moving average at $291 and continues to surge higher today. I would buy this stock at any price below $300.

Alibaba's e-commerce competitor (JD - Free Report) is also solid long-term Chinese investments. Still, I am hesitant to chase this rally at its lofty valuations and continuously new all-time highs.

Final Thoughts

This election is not over until the fat lady sings, but the markets feel much more confident about the outcome. More than anything, investors just want to get past this election uncertainty. The focus is now shifting towards the economic ambiguity surrounding the resurgence in COVID cases and what sectors the anticipated fiscal stimulus will shelter.

Opportunity in China is ripening, and I would not miss out on this BABA buy.

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Alibaba Group Holding Limited (BABA) - free report >>, Inc. (AMZN) - free report >>