The contrarian opinion

I think there’s a really interesting story here. Being primarily a small and macro cap investor, I don’t tend to get too moved by the bigger macro factors, but anything that turns the needle of an index fund more than 15% in a few days will get me curious.

At a high level, the story starts with investors fearing more regulatory crackdown by the Chinese government. This is on the back of a new set of restrictions on Chinese tutoring companies such as New Oriental Education & Technology and TAL Education Group (who have now had most of their market value wiped out in two sessions.)

So now we’re thinking; well, how far will this go? Will the government prevent more sectors from making profits? Will the big margins of some of these tech companies get them interested to crackdown on big tech and stop them from continue to make eye-watering returns?

Given the actions of the Chinese government has been nearly impossible to predict (how they’re dealing with crypto is another interesting story that exemplifies this), this fear is certainly not unfounded.

I think the contrarian opinion worth considering here is this:

It’s one thing to stop private education from making a profit; education is often largely a government services in many countries. But given the amount of dependency the population has on these big tech giants, would it be even feasible to stop them?

Turning this into something a little more tangible, if we take the biggest holding in this portfolio, which happens to be Alibaba; the numbers are staggering and speaks to the mission it would be to stop such a Juggernaut. They made 717.29B in revenue last year, that’s 70% more than Amazon made last year. On a balance sheet perspective, Alibaba looks strong; While they have 179.91B in debt, 483.45B in cash. That’s a lot of coverage for a rainy day.

Looking into a lot of the Top 10 holdings, I find similar patterns; massive companies, but still with attractive growth, stable balance sheets, and the recent selldown prices them pretty attractively.

I thought it would be valuable to share this perspective for those with a healthy risk for appetite who like to compliment their local small and macro caps with some international ETFs.