Legendary value investor Warren Buffett and his long-time business partner Charlie Munger, the vice chairman of Berkshire Hathaway, have made fortunes with a contrarian “value” investing approach and have recently turned their attentions to Alibaba despite the negative market sentiment surrounding Chinese equities.

Alibaba is not only one of Munger’s favourite value investments, but also the second-largest holding of the $1.8bn Xtrackers MSCI China UCITS ETF (XCS6), the largest ETF in Europe offering broad exposure to Chinese equities.

Yet XCS6 has underperformed the US stock market, which is likely to continue given the geopolitical landscape.

Munger holds Alibaba despite poor performance 

While Munger values Alibaba’s business far more than the stock price, the market does not agree. 

He last purchased Alibaba shares in the final quarter of 2021. His first-quarter 2022 disclosure showed Munger sold half of the long position, or 302,060 Alibaba shares. At the end of the second quarter, his DJCO held 300,000 Alibaba shares worth $33.4m at $111. And at the $91 level on 8 August, the investment is now worth $27.3, an 18.3% decline since 30 June.

Alibaba shares closed finished 2021 at $119 and have made lower highs and lower lows since reaching a record $319 high in October 2020.

ETF exposure 

XCS6 holds 9.9% of its net assets in Alibaba shares and charges an expense ratio of 0.65%.  

The S&P 500 is the most diversified US stock market index and the bellwether for the overall equities market. The S&P 500 reached its pandemic-inspired low in March 2020 at 2,192. The index closed 2021 at 4,766, a 117% gain. At the 4,143level on 8 August, the index was 13.1% lower in 2022.  

Meanwhile, Alibaba shares fell to $170 in March 2020 and were at the $119 level on 31 December 2021, a 30.1% decline. On 8 August, Alibaba shares were 23.2% lower in 2022. 

Alibaba and XCS6 have underperformed the S&P 500 since the low in March 2020, with Alibaba shares doing worse than XCS6.

Broader Chinese stock market 

The overwhelming reason Munger and other investors turn to Chinese over US stocks is the value proposition. China is the world’s second-leading economy and the most populous country.  

But the performance of Alibaba and the wider Chinese market has been a compelling reason for contradicting the almost century-old value investor. The early February “no-limits” agreement between Chinese President Xi Jinping and Russian President Vladimir Putin put western economies at odds with the two nuclear powers. Russia’s invasion of Ukraine pushed the sides further apart.

Speaker of the House of Representatives Nancy Pelosi's visit to Taiwan last week further escalated tensions, infuriating China’s leadership. In the aftermath of Pelosi’s trip, China cut off some diplomatic channels with the US. The potential for further deterioration is high and could lead to the delisting of Chinese stocks from US exchanges. 

Munger is betting that economics and value will cause his investments to appreciate over time. However, the geopolitical landscape continues to point to risk in Chinese assets. So far this year, geopolitical risks have been more influential on share prices.

Investment in Alibaba and Chinese stocks requires patience and perseverance in the current environment. Swimming against prevailing trends can offer some of the most exciting rewards, however, the risk is always a function of potential profits in stocks and markets across all asset classes. There are never guarantees in markets.

"Be fearful when others are greedy and greedy when others are fearful," Buffett once said.  

In August 2022, the market remains fearful of Alibaba and Chinese stocks.

This story was originally published on ETF.com

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