Retail investors are loading up on Chinese ADRs like Alibaba despite the risks

Published Wed, Aug 25 20212:58 PM EDTUpdated Wed, Aug 25 20214:26 PM EDT

Retail investors ignored apparent risks and scooped up more Chinese-listed companies in the past five days than the group has since 2014, according to Vanda Research. Since last Tuesday, retail investors have bought more than $400 million in Chinese technology ADRs, the firm said. Retail volume increased nearly 270% in Alibaba and 170% in JD.com from the month prior, Vanda Research said. Shares of Chinese giant JD.com on Tuesday soared more than 14% and e-commerce company Alibaba popped more than 6% amid the attention from the retail crowd. Pinduoduo surged more than 22%, and Baidu rallied nearly 9%. Vanda Research senior strategist Ben Onatibia warned about retail investors' tendency to chase momentum trades. "Much like Chinese ADRs, retail investors have a tendency to load up on QQQ and SPY when stocks tumble, but demand for these instruments fades as soon as prices start rising," Onatibia said. "In contrast, retail investors tend to be momentum chasers in speculative stocks, where they've become the marginal price setter." Beijing has cracked down on industries from tech to education and gaming, while tightening restrictions on cross-border data flows and security. The government has gone after some of China's most powerful companies, including Didi, Alibaba and Tencent. Investors could be buying the dip recently after getting more clarity on Beijing's measures. China's cyberspace regulator earlier this week laid out two main conditions for companies wanting to go public, including complying with national laws and regulations and ensuring the security of the national network. But Chinese companies are still not out of the woods. The Securities and Exchange Commission is stepping up its oversight on Chinese companies seeking a listing on U.S. stock exchanges. The agency said it will require additional disclosures about the company structure and any risk from future actions from the Chinese government. SEC Chair Gary Gensler told Bloomberg News on Tuesday that he pledged to strictly enforce U.S. audit rules for Chinese companies. He also warned that companies could be ejected from U.S. exchanges as soon as 2024. Vanda said retail buying reached its apex Monday, when Alibaba was the most-bought stock in the U.S., more than doubling the purchases of Pfizer, the second stock in the VandaTrack list. "The most important singularity of retail purchases of ADRs is that they weren't contrarian," Onatibia said. "Since the regulatory crackdown started, retail investors increased their buying on dips, providing liquidity to institutional investors who were exiting long positions." Despite Tuesday's pop, some of these Chinese companies have performed better over the past five days than others. Shares of JD.com are up more than 11% since last Tuesday, while Alibaba is down 8% in the same time period. Shares of Didi are up about 2% since last week and Pinduoduo has rallied nearly 17%. TAL Education is up 1% and Tencent Music is about flat since last Tuesday. Baidu shares have gained about 3% in that time. Vanda expects retail demand for the Chinese-listed names to dry up in the coming days. This is partially due to other retail favorites garnering more attention. Several meme stocks like GameStop and AMC Entertainment took off on Tuesday for no apparent reason . "Demand for vaccine manufacturers has remained solid and semiconductor stocks like NVDA and AMD, which are perennial retail favorites, have experienced a major increase in flows. Retail demand for gaming and meme stocks also rose on yesterday's rally, increasing the competition for scarce retail money," added Onatibia. — with reporting from CNBC's Yun Li. Correction: A previous version misstated Onatibia's first name.

Signage for Alibaba Group Holding Ltd. covers the front facade of the New York Stock Exchange November 11, 2015.

Brendan McDermid | Reuters

Retail investors ignored apparent risks and scooped up more Chinese-listed companies in the past five days than the group has since 2014, according to Vanda Research.