The novel coronavirus COVID-19 was initially diagnosed in Wuhan China in late 2019.
As the spread of the virus picked up, the Chinese government began to quickly shut down the city of Wuhan which began to reduce commerce in many of the largest cities in China.
While stocks in China started to come under trading pressure, the rest of the world did not feel the impact of the virus on their businesses until the end of the Q1 of 2020.
The global slow down which has significantly altered economic growth in China has continued into the Q2 of 2020. Following a Q1 GDP print that saw the Chinese growth contract, China announced that manufacturing in April continued to slow. China’s manufacturing sector has been hit by slowing export demand due to the economic impact of the global coronavirus pandemic. What is surprising is that mixed results were depending on the report you evaluate.
Manufacturing PMIs Slump
The results for April, according to a private survey conducted by Caixin/Markit show that the manufacturing Purchasing Manager’s Index for April was 49.4 which reflects contractionary territory. Reading on a PMI survey below 50 reflects contraction while readings above 50 reflect expansion. Expectations had been for the Caixin/Markit manufacturing PMI to come in at 50.3, compared with 50.1 in March.
Separately, China’s National Bureau of Statistics said manufacturing activity in the country expanded slightly, to 50.8 for April, as compared to 52.0 in March. Expectations had been for the official manufacturing PMI to come in at 51.0 in April.
Stock Prices Drop Sharply and then Rebound
Two prominent Chinese stocks began to experience downward pressure in early January as the spread of the coronavirus moved through Wuhan and the surrounding cities. As the Chinese government tried to scramble to invoke social distancing, stock prices moved lower. While Alibaba dropped a robust 24%, Baidu was hammered falling 42%.
Alibaba provides access to goods and services through its online platform and as the fallout from the virus continued to drive down economic growth the access that Alibaba provided became essential. In a way that was like how Amazon performed in the US once it was clear that many would need to quarantine, Alibaba benefited. This benefit has allowed the stock price to outperform, despite the need and demand for Baidu. Baidu focuses on many software and technology-related activities and is most well known for its search engine capabilities.
Prices of both stocks tumbled in the Q1 but began to bottom in mid-March as the spread of the virus throughout China slowed. March appeared to be a bottom for most global stock markets, which started to rebound and surged in April. While Alibaba saw the price of its stock rebound sharply, the rebound was more subdued for Baidu. Momentum on both company stocks is negative as the MACD (moving average convergence divergence) generated a crossover sell signal. This occurs as the MACD line (the 12-day moving average minus the 26-day moving average) crossed below the MACD signal line (the 9-day moving average of the MACD line.
The Bottom Line
The upshot is that some of the most prominent Chinese companies in the technology space have seen mixed results after rebounding following a robust decline in Q1 of 2020. While Alibaba dropped the decline was much less pronounced compared to another technology giant Baidu. The ensuing rally was also in Alibaba’s favor. Despite a robust rebound in share prices, momentum in stock prices remains negative.