Star Magnolia Capital
Monthly Global Views - Great Decoupling (June 2020)
Updated: Jun 17, 2020
By Star Magnolia's Analysts (Penny Shen and Jiawei He)
Great Decoupling #1: Stock Market Return by Country
2020 is a difficult year for each of us in the world as we are suffering from the pandemic. As of 15th June 2020, WHO announced that the confirmed COVID-19 cases have reached 7,823,289 in 216 countries. 431,541people died due to Covid-19, which is a terrible fact. More dangerous thing is that we are not sure when Covid-19 will stop.
At the same time, this tragedy brought adverse impacts on the global economy and the stock market. We experienced a significant level of “volatility” in the stock markets… yes, volatility, as some of the stock markets saw dramatic comebacks from the lows in March. As Figure 1 shows, 6 stock markets out of 40 which we are tacking on our World Market Monitor are in the positive territory while 22 markets are still down more than 10%. Based on the COVID-19 data provided by One World in Data, the more severe COVID-19 impact is, the better the stock market tends to perform (Figure 2).
Figure 1: Stock Market Returns by Country as of June 15, 2020 (source: MSCI ETF)
Figure 2: COVID-19 and Stock Market Returns
Great Decoupling #2: Stock Market Performance by Market Cap
Despite the severe impact of COVID-19 and the Black Lives Matter movement, the US stock market has been the best performing one in the world, however, even within the US stock market, the large-cap companies outperformed the mid-cap and small-cap companies with wide margins. (Figure 3)
Figure 3: US Stock Market Performance by Market Cap
Great Decoupling #3: Standard 5 vs. Poor 495
Even within the large-cap (S&P 500), the divergence exists. The five large companies by market cap (1% of S&P 500 constituent), which include Apple, Microsoft, Google, Amazon, and Facebook, now account for 16.8% at the end of 2019 among all the market cap of S&P 500. Let’s call them Standard 5. The rest, let’s call them Poor 495.
At this point, you shouldn’t be surprised to see Standard 5 outperformed Poor 495, but the degree of the outperformance is still surprising. Since the end of 2019, the performance gap between Standard 5 and Poor 495 was27.7% as Standard 5 returned 17.6% and Poor 495 returned -10.1% through June 14. The weighting of Standard 5 increased from 16.8% to 20.9%. Furthermore, if we look at figure 5, you can see that the weight of Amazon increased more than other companies among Standard 5.
Figure 4: Standard 5 vs. Poor 495 YTD
Figure 5: Standard 5 Weighting
Great Decoupling #4: Ecommerce Giants
How did the E-commerce Industry Grow During the Covid-19 Pandemic?
People were trapped at home because of Covid-19, and almost no stores were open in the street, so shopping online was more attractive and convenient than ever. Figure 6 shows that the number of visits on e-commerce platforms increased by 11.94% globally from January 2020 to March 2020.
Figure 6: Coronavirus Impact on Retail E-commerce Website Traffic Worldwide as of March 2020
Nonetheless, it does not mean that all online stores were popular. As figure 7 represents, the sale of medical products raised more than 4x. Meanwhile, the sales of cleaning and baby products increased by approximately 2x. On the other hand, fewer people cared about clothes, because probably pajamas are the only clothes people needed during the lockdown period.
Figure 7: E-commerce Consumer Sales in COVID-19
Source: Common Thread
Alibaba vs. Amazon
Based on the previous content, we roughly know why Amazon’s stock price increased so much. Then if we look at China, How about Alibaba? Alibaba and Amazon are two giants in the e-commerce market. It is reasonable to say that the stock prices of Alibaba and Amazon climbed a lot together during Covid-19 because of the boom of the e-commerce industry during the lockdown period. Let us look at Figure 8 below.
Figure 8: Stock return, Alibaba vs. Amazon
One interesting thing is that the stock price of Alibaba was almost flat from Dec 2019 to June 15. By contrast, the stock price of Amazon soared by 34.37% in the same period. Whereas, Chinese always like purchasing online and Covid-19 accelerated this behavior. It is unusual that its stock price did not move up.
Figure 9: Amazon vs. Alibaba - Fundamentals
Figure 10: Market Cap
Figure 11: EV/EBITDA
How Can We Explain the Valuation Gap?
Both Amazon and Alibaba were beneficiaries of COVID-19 pandemic and both businesses are fundamentally strong, however, the valuation gap widened. Why?
Softbank Selling Alibaba’s Shares
Alibaba’s largest shareholder, Softbank, is in a dire situation due to the underperformance of the $100 bn Vision Fund. Softbank’s stock price plummeted more than 70% during the pandemic period before Softbank announced a massive share buyback. Softbank is also under pressure of an activist investor, Elliott. In order to secure funding for the share buyback, Softbank decided to unload a large chunk of Alibaba shares. This resulted in the downward pressure to Alibaba’s share price
Loss of Confidence in Chinese Stocks
Luckin Coffee gave a shockwave to US-listed Chinese stocks. With the fear of delisting, many US investors want to unload Chinese stocks regardless of the underlying performance.
Alibaba’s Slow Start of Cloud Solutions
Amazon’s cloud solution, or AWS, is contributing almost 20% of its operating income. Alibaba’s cloud service, which was launched in 2009, is still losing money although it is becoming very close to a breakeven.
China’s E-Commerce Market is Becoming More Competitive
E-commerce is extremely competitive in China. Although Alibaba still dominates the market, other new competitors, like JD and Pinduoduo, never stop challenging. However, Alibaba lost market share does not mean it lost revenue. The whole market is growing and competition boosts improvements. Moreover, apart from e-commerce, Alibaba also has developed other businesses.
Figure 12: The GMV distribution of main e-commerce in China
As you can see most explanations to Alibaba’s underperformance to Amazon are technical ones, but the sentiment on China’s dominant e-commerce business is far worth than its counterpart in the United States.
We are in the middle of the paradigm shift. The modern-day globalization, which started 50 years ago and accelerated over the last 30 years, is ending and we will see the era of the Great Decoupling. We don’t know how long this new paradigm will last, but it is not going to be short, unfortunately.