The American stock market has outperformed just about every other global market for much of the last decade.
Since 2010, the S&P 500 rose 285% and the Nasdaq 100 682%… while the biggest market in Europe, Germany’s DAX Index, only rose 161%.
That success is due in part to the consistent performance from large-cap growth stocks over the last decade. Stocks like Apple, Amazon, Alphabet, Microsoft, and Facebook dominate the short list of the world’s largest companies…
Just take a look at the movement of the Schwab U.S. Large-Cap Growth ETF (SCHG).
SCHG represents the best and fastest growing stocks in the market. Its largest holdings include Apple and Microsoft. These stocks have done tremendously well over the last year and show no signs of slowing down.
There’s been talk of antitrust laws to curtail their power, influence, and dominance of their respective niches in the past. However, there’s not much evidence of substantive action to break up these companies. In the meantime, they continue to power ahead to new highs.
In the U.S., we worry about companies gaining monopoly status.
Monopolies restrict competition and lead to worse outcomes for consumers. Historically, when antitrust measures have been imposed, they’ve caused some concern in the short term, but investors come out ahead in the end.
However, it’s a very different story in China. They’re very focused on shrinking the influence of their most successful companies. In China, the Communist Party will do whatever it takes to maintain control. If that means decapitating their most successful companies… so be it.
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There are 244 Chinese companies listed on U.S. exchanges. Some, like BABA and JD, are among the largest companies in the world and occupy positions in U.S. indices. Four are part of the Nasdaq 100.
Investors like high growth companies because they have the potential to become some of the biggest companies in the world. These kinds of companies tend to crush earnings expectations year after year.
High growth in emerging markets holds out the promise of even more impressive returns.
That’s what attracts investors to Chinese stocks. The problem is China has called time on high-growth companies. In the last few months, measures have been introduced to limit the growth of companies like Alibaba, Tencent, Meituan, New Oriental Education, and now Didi.
Didi in particular is an interesting case. The company was warned two weeks ago not to seek an IPO. It went ahead anyway, and the share was listed on our stock market last week.
However, the company’s app was removed from app stores in China on Monday. As a result, shares are likely to suffer this week as investors price in the potential that the company’s days of higher growth are over.
If China were engaging in what we understand as antitrust, that would be understandable. Investors would be relatively well protected because they would foster competition by breaking up companies. Instead, the most successful companies are being forced to shrink because they represent power centers outside of Communist Party rule.
The irony is Didi wouldn’t exist if the government hadn’t helped it. When Uber started up in China, the Communist Party ensured a domestic competitor would succeed. After a while, Uber was forced to sell its operation to Didi and had to exit the Chinese market. Didi is now by far the largest Chinese ride hailing app.
With these new measures, the message is clear – Chinese companies will only be allowed to grow so big before they hit limits. That’s terrible news for Chinese growth companies.
As investors, we want the chance to invest in a company that has potential to become the largest in the world, and remake how we live our lives along the way. The Communist Party is making sure Chinese companies will not get that chance.
So, don’t get swept up by stories of high growth in China.
There are better returns to be had at home with a lot less risk – stocks like Amazon, Thermo Fisher, and PayPal. The performance of the Schwab Large-Cap Growth ETF (SCHG) is a testament to that fact.
All the best,
Eoin Treacy
P.S. Last Friday, I held another one of my video presentations where I talked about what I see happening in the markets.
I covered what I think about the activity in bitcoin, inflationary pressures, and the next move for copper. If you missed it last week, you can click here to watch, and tune in again on Friday for another video on what’s been going on this week.