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Why Burry Choose China Over US Stock?
Today we cover Michael Burry has recently sold over $70 million worth of his U.S. stock holdings, taking action during one of the strongest U.S. stock market rallies in history. This move has drawn comparisons to his behavior in the lead-up to the 2008 financial crisis, which he accurately predicted and profited from significantly. During that crash, Burry personally earned around $100 million, while his investors made over $700 million as the market plunged nearly 60% in a matter of months.
Now back in the spotlight, Burry appears to be adopting a pessimistic stance on the American stock market, as evidenced by his recent decisions to offload much of his U.S. stock portfolio. He has also made a few intriguing trades that deserve closer examination.
It’s important to note that Burry’s portfolio moves are disclosed through mandatory 13F filings, which are not real-time updates but rather reflect data from the previous quarter. While this lag means the information may be outdated, the filings still provide insight into his strategy.
In recent filings, Burry has sold out of 14 U.S. stocks, reducing his exposure to American markets by over $70 million. Earlier in 2024, he also exited positions in major tech companies like Amazon and Alphabet. So far, this hasn’t seemed like the best call, as these companies have been among the top-performing U.S. stocks in 2024 up until the fourth quarter.
Why is Burry pulling out of strong performers? He has a history of going against the crowd when he believes the risks outweigh the rewards. Currently, the valuations of U.S. companies have reached concerning levels. For example, the S&P 500’s price-to-earnings (P/E) ratio is at levels last seen during the late 1990s internet bubble and briefly in 2021 after the pandemic, when low interest rates and stimulus drove stock prices higher.
US Stock Overvalue High Valuation
Burry likely sees these high valuations as signaling limited upside potential for U.S. stocks, coupled with significant downside risk. Beyond valuations, he may also be wary of market concentration. Today, just four companies—Amazon, Microsoft, Nvidia, and Apple—make up 25% of the S&P 500. This heavy reliance on a small group of high-performing stocks creates a fragile market structure, similar to a table supported by only a few legs. If one “leg” falters, the entire market could suffer.
Market concentration is currently at one of the highest levels in the last three decades, surpassing even the peak of the dot-com bubble in 2000. Back then, a small group of companies like Cisco, GE, Intel, and IBM dominated the index, leaving it vulnerable when the bubble burst.
This combination of overvaluation and market concentration may explain Burry’s bearish outlook on U.S. stocks and his decision to shift focus to other markets, including the Chinese market.
A few large and expensive stocks currently dominate a significant portion of the market index—a phenomenon we’ve seen before but now to an even greater extent. However, it’s crucial to understand that neither market concentration nor valuations serve as reliable signals for market timing. Stocks can remain overvalued, and market concentration can stay elevated for extended periods.
Michael Burry likely recognizes this but appears unwilling to take on the risks associated with these market conditions. The question now is: what is he buying instead?
US Stock vs China Stock
In the third quarter of 2024, Burry made a substantial pivot toward three major Chinese tech companies. He increased his stake in Alibaba by nearly 29%, bringing the total value of that position to $21 million. He also doubled his investment in JD.com, raising it to $20 million, and significantly boosted his stake in Baidu by 67%, bringing it to about $13 million. Combined, these three positions account for nearly $55 million, or approximately 13% of Burry’s entire portfolio.
Part of Burry’s enthusiasm for Chinese stocks likely stems from their historically low valuations. China’s stock market currently has a price-to-earnings (P/E) ratio of just 10.2—one of the lowest levels seen since 1996. While these valuations suggest low downside risk, investor sentiment toward Chinese stocks remains overwhelmingly pessimistic.
This makes China a stark contrast to U.S. tech stocks. Chinese stocks come with lower valuation risk and higher potential rewards if the tide turns in their favor.
So, what could spark a turnaround in China? The country’s economy has been facing multiple headwinds, including sluggish growth, a troubled real estate sector, and weak consumer demand. Consumer confidence in China is at its lowest since the 1990s. When confidence is low, people tend to save more and spend less, which can further suppress economic growth. These challenges have contributed to a more than 60% decline in China’s stock market between 2021 and early 2024.
In response to these issues, the Chinese government rolled out several rounds of stimulus in 2024, aiming to stabilize the economy and revive growth.
In January 2024, China’s central bank took a significant step to support economic activity by cutting the reserve ratio requirement by 0.6%, injecting approximately $140 billion into the economy. This triggered a short-term rally in the Chinese stock market, but most of those gains were eventually erased.
China Stimulus Package
Later, in September 2024, the central bank announced additional stimulus measures, including interest rate cuts, mortgage rate reductions, and an equity market support package worth about $110 billion. This wave of measures sparked an immediate 50% surge in the Chinese stock market.
More recently, in October 2024, China unveiled a $1.4 trillion stimulus package to be implemented over the next five years, with the possibility of further measures to follow. Dubbed the “Bazooka Stimulus” due to its scale, this plan underscores the Chinese government’s determination to achieve economic growth at nearly any cost.
These stimulus efforts are expected to have a profound impact on Chinese consumers. Data indicates that Chinese disposable income—essentially the money left after taxes and essential expenses—is projected to grow rapidly in the coming years. After three years of stagnation, disposable income began to rise in 2024 and is now forecasted to increase by 50% over the next five years. This surge in spending power could significantly boost revenues for companies like Alibaba, JD.com, and Baidu.
Michael Burry appears to be betting that these measures will eventually drive growth for China’s largest tech firms, presenting enormous potential upside. However, he is also mindful of the risks. In the third quarter of 2024, he hedged his investments in Chinese stocks with put options, which act as a form of insurance against short-term declines.
For Alibaba, Burry purchased put options covering about 169,000 shares valued at $18 million. He hedged his entire JD.com position with puts on 500,000 shares and bought put options for approximately 83,000 Baidu shares, valued at $8.8 million. Altogether, these hedges amount to $43.6 million, covering nearly 80% of his $55 million investment in Chinese stocks.
This cautious approach suggests Burry is aware of potential short-term downside risks, including geopolitical tensions such as U.S.-China trade disputes. For instance, under Trump’s presidency, trade conflicts strained relations between the two nations, impacting Chinese stocks. Whether the effects of these disputes will be short-lived or have lasting implications remains uncertain.
Burry’s strategy reflects a balance of conviction and caution. On one hand, he views the U.S. stock market as overvalued and overly reliant on a handful of big players. On the other hand, he sees long-term potential in China’s leading tech companies, supported by substantial government stimulus and rising consumer demand. By hedging his China investments with put options, he protects a significant portion of his portfolio from potential losses while remaining positioned for upside if his thesis proves correct.
Only time will tell whether Burry’s calculated approach will yield substantial rewards or if the risks he has taken will outweigh the potential benefits.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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