Update on KWEB: The prediction I made in July 2021, titled “Two Hours of Almost ‘Free’ Money,” has been proven to be correct by the market. KWEB reached $55 a share on September 7, 2021.

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Full disclosure: I own KWEB the ETF. This article is NOT investment advice. Do your own due diligence.

I am increasingly convinced that the price collapse of overseas–listed Chinese stocks is probably coming to an end very soon. Take KraneShares CSI China Internet ETF (KWEB) as a market proxy for overseas–listed Chinese stocks. I believe the bottom is likely to appear between now and early 2022.

Market timing is a bad idea — I truly believe that. However, I also believe that investors should not “lie flat.” By studying market structures and investor sentiments, one should still be allowed, at least, to make “educated” market calls, despite the speculation elements involved. (Oxymoron? Well, so be it then.)

Here we go, the three reasons that give me the confidence to call the market bottom.

1. It is not zero.

Despite geopolitical risks and regulatory concerns, overseas–listed Chinese stocks, in aggregate, are not zero — from either a company fundamental perspective or from a stock “ticker” perspective. A few names may be “going to zero” because their underlying businesses are damaged and may eventually fold. But the majority of overseas–listed Chinese companies have real businesses that are well.

Some investors fear forced de-listing and forced privatization at a depressive valuation level. This fear is probably overblown, particularly for the larger names. If they like or if they must, these companies can float their shares in Hong Kong. Certain Chinese companies, like Alibaba, already allow shareholders to convert their ADR holdings to Hong Kong–listed shares.

Quote KraneShares:

We have already seamlessly executed tests converting Alibaba US to Alibaba HK. The HKSE expects to have a new rule go into effect January, 2022 that will allow all US-listed Chinese companies to re-list in Hong Kong.

(source: https://kraneshares.com/kweb-china-internet-market-volatility-faq/)

2. It has been almost a full year.

KWEB peaked on February 17, 2021. From that point to now, KWEB has been in a seemingly unstoppable decline. From February 2021 to December 2021, it has been almost a full year, which is long enough for most investors to come to terms about what has happened to these Chinese stocks. By now, investors have had more than enough time to settle their minds, comprehending what has transpired in the recent past and anticipating what might still take place in the near future. I bet countless expert calls have been made on contemporary subjects. I also bet numerous reports and books were read on related subjects. Enough time has passed to allow any players, fast or slow, to find a way out, if they so desire. If there is an academic degree in “understanding what has happened to overseas–listed Chinese stocks and what might happen next,” by now, most investors are probably qualified to earn such a degree.

And that is the point here. In financial jargon: expectations and the expectations of expectations, almost all of them are probably already priced in by now.

In layman’s terms: people who want to sell these Chinese stocks have had enough time to sell down their holdings. We will run out of sellers eventually.

3. Fund performance fees for 2021 are determined on December 31, 2021.

Naturally, most funds have a particular desire to avoid drawdowns around year ends. They slow down their buying activities (so as to not create new sources of risks) and/or speed up their selling activities (so as to crystalize paper gains). This particular desire is made particularly desirable during this challenging year. If a fund is just a few percentage points above the water by mid-December, it is imperative to keep it that way — do not take risks in the remaining few days to risk pushing the fund into the red, thus losing out on the fees.

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The combination of these considerations leads me to make the assessment that at this point in time, overseas–listed Chinese stocks are in a state where sellers are withering away, and buyers have their hands tied. Isn’t this a compelling definition of what a market bottom is?

It is absurd to me that the entire space of Chinese Internet companies, Tencent, Alibaba, many great names, added together, now weighs just half of the market cap of Apple (AAPL). It represents, perhaps, a historic market dislocation.

(END)