Unraveling Alibaba's Growth Trajectory with Ant Group's New Leadership
China's Stimulus Pledge and Alibaba's Share Surge
Shares of Alibaba and other Chinese companies listed in the U.S. experienced a significant upswing on Monday. According to a report from state-run news agency Xinhua, the Chinese government is set to be "more proactive" with stimulus spending in 2025. This news has instilled confidence among investors, leading to a surge in Alibaba's stock. The company's strong position in the market and its potential to benefit from increased government spending have likely contributed to this remarkable performance.Alibaba has long been a key player in the Chinese economy, and this latest development further solidifies its standing. The expansion of stimulus spending is expected to boost economic growth and create more opportunities for businesses like Alibaba. With its diverse range of services and global presence, the company is well-positioned to capitalize on these favorable conditions.Jack Ma's AI Touting at Ant Group Event
Billionaire Jack Ma, the co-founder of Alibaba and Ant Group, made a significant statement at an event on Sunday. In a rare public appearance, he highlighted the immense promise of AI technology. According to a report from Reuters citing Chinese media outlet 36kr, Ma emphasized that from today's perspective, the great changes brought by the AI era in the next 20 years will exceed everyone's imagination.Alibaba has been at the forefront of implementing an "AI first strategy," aiming to make core computing resources more accessible to customers of all sizes. This approach has allowed the company to leverage AI technology to enhance its services and gain a competitive edge. In April, Alibaba's cloud division took a bold step by cutting prices for its international customers, demonstrating its commitment to growing its reach and driving innovation through AI.Ant Group's Leadership Transition
The event also witnessed a significant leadership change within Alibaba affiliate Ant Group. The company named finance chief Cyril Han as its new CEO, effective March 1. This move marks a new chapter for Ant Group and is expected to bring fresh perspectives and strategies to the organization.As of September 30, Alibaba held a 33% stake in Ant Group, which operates the Chinese payment platform Alipay. With Cyril Han at the helm, Ant Group is poised to continue its growth and play a crucial role in the digital payment landscape. The leadership transition is likely to have implications for the company's future development and its ability to adapt to the evolving market dynamics.Alibaba shares showed a strong performance on Monday, rising close to 9% intraday and gaining over 20% since the start of the year. This remarkable growth is a testament to the company's resilience and its ability to navigate through changing market conditions. As Alibaba continues to explore new opportunities and leverage emerging technologies, it remains a key player in the global business arena.Mondelez's Sweet Move to Dominate the Candy Market
Mondelez's Sweet Portfolio and Hershey's Iconic Brands
Mondelez boasts an extensive range of snacks such as Chips Ahoy, Ritz Crackers, Wheat Thins, and Sour Patch Kids. In addition to these popular treats, it also owns the beloved Oreo and Cadbury brands. Hershey, on the other hand, is renowned for its iconic products like KitKats, Reese’s, Jolly Rancher, and SkinnyPop Popcorn. The potential combination of these two powerhouses would bring together some of the most well-known confectionary names. 2: The diversity in their product offerings gives both companies a wide reach. Mondelez's snacks are found in grocery stores across the nation, while Hershey's chocolates and candies have a loyal following. This combination could open up new markets and customer segments, allowing the merged entity to tap into previously untapped areas.Market Trends and the Rationale Behind the Deal
In today's economic climate, health-conscious customers are becoming more cautious about their snacking habits. With inflation remaining high, they are purchasing fewer unhealthy foods and keeping a closer eye on their spending. This has led to a surge in dealmaking as companies look to strengthen their positions and gain a competitive edge. Mondelez's potential acquisition of Hershey is seen as a strategic move to enhance its purchasing power in the increasingly expensive cocoa market. By combining forces with Hershey, Mondelez can secure a stable supply of cocoa and reduce costs. 2: Additionally, the deal would strengthen Mondelez's access to the US market. Hershey has a robust brand presence in North America, and by leveraging this, the merged company can expand its reach and increase its market share. It also creates avenues for expansion into Europe, where Hershey has a strong foothold. This strategic move could position Mondelez as a global leader in the candy industry.Previous Attempts and the Role of the Hershey Trust
This is not the first time Mondelez has shown interest in Hershey. In 2016, Hershey rebuffed a $23 billion bid from Mondelez. The Hershey Trust, which holds a significant majority of the candy giant's votes, has been reluctant to sell the iconic company. This makes the current discussions all the more intriguing as Mondelez will need to convince the Hershey Trust of the value of the proposed deal. 2: The trust's stance highlights the importance of shareholder approval in such large-scale transactions. Mondelez will have to navigate through the complex web of shareholder interests and regulatory hurdles to make this deal a reality. If successful, it could mark a significant milestone in the candy industry and set the stage for future mergers and acquisitions.Prepare for the Storm - BCA Research's Stock Outlook
Consumer Momentum Slowdown
After the surge in "revenge spending" following the COVID-19 pandemic, consumer momentum has shown a distinct slowdown. Home Depot and Lowe's, for instance, have witnessed a slump in revenues despite the increase in home equity. This indicates that the previously expected pickup in home improvement spending may not materialize as expected. Walmart and Target's earnings calls have also signaled a rise in bargain hunting as consumers tighten their budgets. It seems that the post-pandemic spending spree is coming to an end, and this could have a significant impact on the stock market.
Compared to the end of 2019, US consumers have seen a notable increase in home equity and household wealth due to the stock market's stellar rally. However, this has not translated into sustained spending growth. The data clearly shows a weakening in consumer sentiment and spending patterns, which is a cause for concern for stock market investors.
Softening Labor Market
The October employment data presents a mixed picture. While the job openings rate climbed from a four-year low in September back above the 4.5% threshold, the quits rate rose and the hires rate slipped to revisit a four-year low set in June. This "one-step-forward-two-steps-back" trend suggests that the labor market is softening, which could lead to a recession if it continues.
BCA analysts believe that this softening in the labor market will eventually provoke a wave of layoffs. A shrinking payroll could lead to slower spending, which in turn could trigger further payroll contraction and slower spending growth. This vicious circle could have a domino effect on the stock market, as companies with weaker financials may see their stock prices decline.
Historically High Stock Valuations
The S&P 500 is currently trading at 23 times above annual earnings, which is nearly two standard deviations above its mean. Analysts project earnings-per-share growth of 13% in 2025, which is nearly double the 6.6% postwar average. Such extreme valuations make risk assets vulnerable to even slight disruptions.
With financial markets currently discounting the probability of a recession, stocks appear to be a risky investment. Even in the absence of a recession, risk assets could disappoint as the current prices do not bode well for future returns. These high valuations pose a significant outsize risk to the stock market's two-year bull rally.
As a result of these three growing trends, BCA Research recommends rotating out of stocks before buying the dip in the event of a sharp decline. They expect an equity bear market to unfold sometime in the first half of 2025 and are looking for an opportune entry point to position against equities if their stop is triggered. They will be eager to narrow the underweight soon after the 20% bear-market threshold is reached and may look to overweight equities around -30% to -35% if the market falls that much.