Trade War Couldn’t Stop Hedge Funds From Buying These Chinese Stocks

The prolonged and escalating trade war between the United States and China didn’t stop the collection of leading hedge funds in our database from buying into numerous Chinese stocks with greater gusto in the second quarter. That’s not entirely surprising given how much cheaper Chinese stocks now look after a difficult year for the Shanghai Composite Index, which hit four-year lows as recently as the middle of September. The index’s P/E ratio has likewise fallen to its lowest levels since 2014 at 10.8.

According to Bloomberg data, foreigners have invested an additional $29 billion in Chinese stocks in 2018 through Stock Connect, a platform which facilitates the trading of Chinese stocks for international investors. In this article we’ll use Insider Monkey’s own hedge fund ownership data to look at five Chinese stocks which had a net influx of hedge fund ownership in the second quarter.

Insider Monkey’s flagship “Best Performing Hedge Funds Strategy” has returned over 50% in the last year, destroying the market by 29 percentage points. Since its May 2014 inception, the easy-to-follow strategy has returned 121%, beating the bull market by more than 54 percentage points. Our hedge fund strategy’s small number of quarterly picks often span a range of industries and regions, and have included Chinese stock picks like SINA Corp (NASDAQ:SINA), New Oriental Education & Tech Grp (NYSE:EDU), and Momo Inc (NASDAQ:MOMO) over the past year. Check out a detailed analysis of Insider Monkey’s past performance and quarterly stock picks for all the details.

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Alibaba Group Holding Ltd (NYSE:BABA)

Number of Hedge Fund Shareholders of Alibaba Group Holding Ltd (NYSE:BABA) (as of June 30): 117

Value of Hedge Funds’ Holdings in Alibaba Group Holding Ltd (NYSE:BABA) (as of June 30): $15.37 billion

Alibaba Group Holding Ltd (NYSE:BABA) was one of the most popular stocks among the hedge funds tracked by Insider Monkey, with 117 of them owning shares of China’s e-commerce and tech powerhouse on June 30. That was an increase from 111 funds owning Alibaba on March 31. Ray Dalio‘s Bridgewater Associates (84,629 shares) and Barry Rosenstein‘s JANA Partners (439,479 shares) were among the funds to open new Alibaba positions in Q2.

Both Alibaba Group Holding Ltd (NYSE:BABA) and JD.Com Inc (NASDAQ:JD) (which did not make this list) are operating in a legal grey area in China’s pharmaceutical market, where online sales of drugs are prohibited. The two firms have skirted around those rules by requiring payment upon delivery as opposed to being made online, though the orders are still placed online and the Chinese e-commerce firms still get their cut from the sales. The Chinese pharmaceutical market was worth over $122 billion last year, a 9% increase from 2016.

Baidu Inc (NASDAQ:BIDU)

Number of Hedge Fund Shareholders of Baidu Inc (NASDAQ:BIDU) (as of June 30): 67

Value of Hedge Funds’ Holdings in Baidu Inc (NASDAQ:BIDU) (as of June 30): $5.19 billion

Hedge funds were more bullish on internet giant Baidu Inc (NASDAQ:BIDU) than any other Chinese stock in Q2. By the end of the quarter, 67 funds in our database were Baidu owners, up from just 49 at the start of the quarter. Those 67 funds poured more than $1 billion in capital into the stock during the quarter. James Dinan‘s York Capital Management (44,551 shares) and Adam Wolfberg and Steven Landry‘s EastBay Asset Management (165,000 shares) were among the new Baidu owners.

While Baidu Inc (NASDAQ:BIDU) is most well known for its internet services and generates the bulk of its revenue from advertising, its aggressive R&D budget, which amounts to 15% of that revenue, is making the company a leading player in artificial intelligence. In addition to lending its AI might to the Gehua Little Fruit set-top box, which launched at the end of September, Baidu is also working with WABCO Holdings Inc. (NYSE:WBC) on autonomous driving applications that could achieve commercialization within three years.

On the next page we’ll look at three more Chinese stocks that hedge funds were buying in the second quarter.