Michael Burry made a name for himself by correctly predicting and profiting from the 2008 subprime mortgage crisis, as immortalized in the blockbuster motion picture ‘The Big Short’.
Since then, the savvy investor has set his sights on overseas markets — China, to be precise.
Alibaba stock (NYSE: BABA) has been the largest holding of the trader’s hedge fund, Scion Asset Management, for quite a while now. Per the most recent 13-F filing, BABA shares account for approximately 16% of Michael Burry’s portfolio.
The Chinese e-commerce and tech giant has been on a roll lately. However, President Trump’s April 2 tariffs have thrown a spanner in the works. As an additional 34% duty has been imposed on Chinese goods, the People’s Republic has, quite expectedly, retaliated with a 34% tariff levied on American goods.
On April 3, Alibaba stock closed at $129.33. Following the announcement, the price of BABA shares had dropped to $116.42 as of press time on April 4. Nevertheless, with the -9.99% move to the downside factored in, Burry’s biggest stock holding is still up 37.30% on a year-to-date (YTD) basis.
Why Michael Burry’s largest position is at risk of a correction
Since tariffs increase the cost of goods, Alibaba’s e-commerce business could see slowed or even reduced demand going forward. In addition, Beijing’s response, inevitable as it was, is another stepping stone to a full-blown trade war, which would most likely have a negative effect on consumer spending in both countries.
Seeing as how BABA shares are American Depositary Receipts, their price is based on the stock’s original listing, denominated in renminbi/yuan. Therefore, currency exchange rates also play a factor in the price of Alibaba stock, at least in the form that U.S. investors trade. A trade war could easily cause significant changes in the exchange rate, providing yet another risk factor for Michael Burry’s largest holding going forward.
Last but not least, periods of heightened trade tension between the United States and the People’s Republic of China tend to bring about increased scrutiny aimed at Chinese businesses operating in the United States. This, in turn, tends to lead to a selloff, as investors are hesitant to maintain exposure to equities that face policy risks.
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