Prior to the most recent dust up in U.S.-China relations, the case for Alibaba Group (NYSE:BABA) was an interesting one. After Alibaba stock peaked in the early summer 2018, shares have consistently met upside resistance. However, an apparent thaw in trade war tensions suggests a potential breakthrough. After all, a Chinese delegation was willing to meet in Washington for high-level talks.
Now, all hope appears dashed and I’m not using any hyperbole. On Tuesday, Bloomberg News broke a startling development that the White House was “discussing blocking government pension funds from investing in China.” Logically, such a measure would have serious implications for BABA stock, along with high-profile names like JD.com (NASDAQ:JD) and Baidu (NASDAQ:BIDU).
And if that weren’t enough, the South China Morning Post reported that the two sides have not made any progress on key trade issues. Because of this stalling in negotiations, the Chinese delegation will leave on Thursday, a day earlier than scheduled. Unsurprisingly, Dow Jones Industrial Average futures dropped 300 points following the announcement.
You don’t need to read between the lines. This is all around bad news for Alibaba stock.
Of course, the contrarians will argue that BABA stock represents great value. For one thing, Alibaba Group admittedly has great fundamentals. Profitability margins beat out most competitors in the broader retail segment. Revenue growth is very impressive. Just a few years ago, BABA racked up only $15.6 billion in annual sales. Currently, it’s on pace to exceed $60 billion.
Of course, Alibaba Group offers myriad innovations that bolster the longer-term narrative. But none of these things will matter for Alibaba stock in the interim with President Trump in the driver’s seat.
Alibaba Stock Has an Executive Problem
I’m not too sure which way most InvestorPlace readers sway when it comes to politics. But based on prior interactions, I’d guess conservative.
If that’s true, most of you can rejoice: I believe the evidence strongly points to President Trump winning a second term next year. But that’s also bad news if you have substantial exposure to BABA stock.
Now, you might be thinking, “how could Trump possibly win when he is polling so poorly?” I would counter, though, that we should note that polls aren’t always accurate, as the 2016 election proved.
But more importantly, I don’t see the Democrats and the broader left-leaning politicians forwarding any substantive policies. Every time I turn on the news, I’m inundated with cries about Trump’s alleged racism. And leading Democratic candidates like former Vice President Joe Biden have bluntly called Trump racist and divisive.
What’s the problem with all this? Well, people simply get tired of politicians pulling the race card to further their agendas. I agree with The Wall Street Journal op-ed writer Jason L. Riley, who bemoaned the extreme obsession with racial politics.
And with the racism charge dulled, the Democrats have no solutions for real, everyday Americans. This above all else probably explains why most Americans believe Trump will win reelection, even with getting impeached.
Again, that’s bad news for Alibaba stock. No other president in recent memory has imposed such a tough, no-nonsense approach to China. With Alibaba Group in particular being the Asian juggernaut’s flagship corporation, I don’t see a positive outcome for BABA stock in the nearer term.
Let’s also remind ourselves that saving face is a highly revered component of Chinese culture. Right now, the Chinese are losing a lot of it thanks to Donald J. Trump.
Trump Is Doing What Must Be Done
Obviously, the trade war is not a popular topic no matter who’s side you’re on. Small businesses that depend on warm U.S.-China relations have been disproportionately hurt. If tensions continue, all American consumers will start bearing the cost of this conflict.
But what makes this situation especially awkward for stakeholders of Alibaba stock is the trade war’s moral reality. If the U.S. shows any weakness here, it sends the wrong message to our adversaries: they can steal our intellectual property and stymie American interests with little penalty.
President Trump cannot send that message. Especially with an election year coming up, he can’t afford to disappoint his core voting base. That bodes poorly for Alibaba stock for the next 12 months. And it will get even worse if we download Trump 2.0.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.