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How To Make A Bold Bet On A Post-Virus Rebound In Chinese Stocks

February 20, 2020 9:10 am


What Happened

Chinese internet and consumer cyclical stocks, such as Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU) and JD.com (NASDAQ:JD), haven't been immune to coronavirus pressures, but an interesting scenario is emerging.

Month-to-date, the Direxion Daily CSI China Internet Index Bull 2X Shares (NYSE:CWEB) is up about 20%, making it one of Direxion's best-performing leveraged exchange traded funds since Feb. 1.

CWEB attempts to deliver double the daily returns of the CSI Overseas China Internet Index.

Why It's Important

It's certainly plausible to think that Chinese internet stocks would be decked by the coronavirus outbreak, but some analysts view CWEB components as possible beneficiaries from the illness on a longer-ranging basis.

“We think the main long-term beneficiaries of the coronavirus outbreak are Chinese Internet companies with online products and services that are not yet well penetrated, as they could see an increase in users,” said Morningstar in a recent note. “This includes companies offering online education, fresh food delivery, and office tools, which are likely to see faster adoption rates.”

Those sentiments are applicable to the likes of Alibaba and JD.com, which combine for over 16% of CWEB's underlying index. Tencent (OTC:TCEHY), the second-largest component in CWEB's index, was also highlighted by Morningstar as a valid coronavirus play.

What's Next

“Drags on overall consumer confidence are short term and are likely to be offset by increased use of online services in the long term for Alibaba and JD.com,” said Morningstar. “Alibaba should see benefits outside of their bread-and-butter businesses because of faster adoption of other businesses.”

Another way of looking at the coronavirus situation as it pertains to Chinese internet names is that it should be short-term in nature and when it's put to rest, there will be near-term benefits for some of the aforementioned stocks, meaning CWEB is an ETF for active traders to monitor in the coming weeks.

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