Alibaba Set to Gain as China Unfreezes Economy
2023.01.31 13:43
- China’s reopening has revived its economy but put upward pressure on commodity prices
- But this is bad news only for the west as it looks to curb inflation
- Amid all of this, Alibaba could emerge as the main beneficiary with significant upside potential
China’s growth rate for 2022 came in at 3%. This is a decent result compared to countries in the west. However, excluding 2020, it is the worst performance for China in many decades.
Recently, China’s leadership took action and, in response to the apparent economic slowdown, decided to implement a series of measures to stimulate growth. Beijing made a 180-degree turn on pandemic restrictions, which were lifted virtually overnight.
In addition, the government, together with the People’s Bank of China, plans to lift some restrictions once aimed at curbing the growth of the real estate bubble. Given the severe demographic crisis, it remains to be seen whether these measures will be effective in the long run.
China’s Opening Will Not Help Fight Inflation
China’s efforts to return to a path of rapid growth will have two main effects on the global economy. On the one hand, increased economic activity, the unblocking of supply chains, and removing travel restrictions should support both Chinese and global economic growth.
After all, China remains the world’s largest factory. On the other hand, as the economy rebounds, demand for commodities such as copper, oil, and natural gas is expected to rise, which will put upward pressure on prices.
Chinese airlines have been experiencing a surge in traffic, pushing up the number of flights and fuel demand and, in turn, the oil prices.
Rising commodity prices will certainly not sit well with Western governments and central banks, whose main objective is to contain rising inflation. Unfortunately for them, oil is still poised to return above $100/barrel this year.
Alibaba Has Strong Growth Potential
The stock market has been in an uptrend for several months and is benefiting from China’s reopening. One of the beneficiaries is Alibaba (NYSE:), which still has significant upside potential. According to the Fair Value Index, the Chinese e-commerce giant could rise by 48%-49%.
Source: InvestingPro
With a support zone around $120, there could be a local correction with initial targets in the $105 and $95 areas. However, I do suspect any descent toward those levels is a buying opportunity for investors.
Alibaba Price Chart
The signal for a sustained bull run is a break above $120, which will open the way for the stock to reach the designated fair value, with a first stop at $140.
Disclosure: The author doesn’t own any of the securities mentioned.
