Just over a year ago, Magellan’s Vihari Ross tipped Chinese tech giant Alibaba as her stock pick for 2020 in Livewire’s annual outlook series. This year, she labelled it as one of the awful calls she made throughout the year.

It was a disastrous year for Alibaba. While not necessarily reflected in its share price, the juggernaut went from bad to worse in 2020. From the failure of the Ant Financial IPO, which was expected to be the largest in history, to the disappearance of founder Jack Ma and finally, and speculation about the Chinese Communist Party (CCP) nationalising the company, the Alibaba shareholders have had to shut their eyes and bear it all. 

But according to Hamish Douglass, Chairman and CIO at Magellan Financial Group, Alibaba is still inherently undervalued today. 

In a recent global strategy update, Douglass spoke about his investment thesis behind Alibaba and other Chinese tech company Tencent, claiming that the regulatory issues are merely short-term blips for the company. In this wire, I outline the key takeaways from Douglass' presentation. 

Five key points from Magellan's global strategy update 

• An update on Magellan's recent performance 
• An interesting discussion on the state of COVID-19 currently 
• Why Hamish Douglass is sceptical on the rollout of the vaccine 
• Magellan's thesis behind Alibaba 
• Why Hamish Douglass is cautious going into 2021 

When discussing increasingly heavy regulatory scrutiny towards Alibaba, Douglass suggested that this is a consequence of the actions of Jack Ma, founder of the company. In October 2020, Ma made critical comments of the CCP at a conference in Shanghai. Ma hasn’t been seen since. Hamish Douglass admitted that his impression of Jack Ma was wrong, and has caused Alibaba to suffer regulatory consequences in the short term. However, he reminded Magellan shareholders that his initial investment thesis on the company remains strong.

“I’ll admit, I was wrong in assessing Jack Ma.”

Douglass emphasised that the antitrust issues Alibaba is currently facing with the CCP is not unique to China or this company. In fact, similar tech giants across the world including Facebook and Alphabet are experiencing similar levels of regulatory scrutiny.

Take Facebook for example. The US social media conglomerate experienced regulatory issues throughout the Cambridge Analytica scandal in 2018 yet have rebounded enormously since. 

It is inevitable that mega-cap stocks of the like will be unable to continue existing without increasing regulatory pressure. Alibaba is no different according to Douglass, who believes that the governance of large international companies will only continue to increase. He reminded viewers of the update that this regulatory pressure has not amounted to the death of Facebook or any other tech company, and the same will apply to Alibaba - it is just a temporary blip. 

“The regulatory risk is real for all of these companies.”

What investors should remember, however, is the speed in which China can enact antitrust policies, comparative to Western countries. In China, no right of appeal exists which means that if companies are not acting in a manner that serves the nation, they can be swept under the rug by the CCP. This is something that Douglass warns of, however, he recognises that whilst the process of regulation is quicker in China, all large tech companies will see the same outcome eventually.

When asked what his standpoint is on Chinese companies like Alibaba and Tencent, Douglass acknowledged that Magellan had increased their risk ratings for companies in the region. This is primarily a consequence of the political action currently being seen in China, as well as the geopolitical tension that exists.

Magellan hasn't given up on China yet though. Douglass reminded shareholders that whilst Alibaba has been in the firing line, particularly in the opening months of 2021, the share price over the last twelve months is up materially. Whilst facing political and regulatory issues, they are critical to the Chinese economy and therefore remain essential, and beneficial businesses.

“We don’t think China is going to cut these companies in half… but they’re going to send signals of how they want those companies to behave. As those signals come out, we’re going to see volatility in the share price.” 

There’s been a lot of speculation regarding the future of Chinese grown tech giants like Alibaba and Tencent, and whilst the short term remains bumpy, Magellan’s investment thesis remains strong. According to Hamish, regulation is a reality that all companies will have to face in the future – Alibaba is just the first to bear the burden.

“We view Alibaba and Tencent, despite all the volatility risk at the moment, as fundamentally undervalued at the present time.”

For more from Magellan’s global strategy update, you can watch Hamish’s presentation here, where he discusses the impacts of the new COVID-19 mutations and what he is anticipating in 2021.