China’s Regulatory Crackdown Spooks Investors
China’s Education Sector in the Spotlight
Chinese stocks declined Monday after the government confirmed it is adding education companies to the list of industries it is keeping in check from a regulatory standpoint. Over the weekend Beijing said it will prohibit certain tutoring firms from profiting off their services. It was among the more assertive steps Chinese regulators have taken to rein in an industry it blames for exacerbating inequality and increasing financial risks for the country.
The moves spooked investors, who worry more regulatory crackdowns are coming. Strategists are now guessing where Chinese regulators will focus next, and are also wondering if they factored in enough regulatory risk when assessing the valuation of existing publicly traded companies. Among the declining stocks were Tencent (TCEHY), Meituan (MPNGY), Alibaba (BABA), Tal Education (TAL), and Koolearn Technology.
Tech Companies Crackdown Intensifies
The education sector was not the only industry to feel pressure. On Monday China’s Ministry of Industry and Information Technology ordered the country’s internet giants to fix certain anticompetitive practices and data security threats. The companies have six months to meet the new standards.
Beijing said the new rules are a result of the sector disrupting market order, mishandling user data, and violating other regulations. Regulators did not list specific tech companies but it is the same criticism that has been lodged against Tencent and Alibaba in recent weeks. With yet another Chinese regulator and government body looking at the tech sector, it added to the selloff in Chinese stocks.
Traders in Two Camps
On Monday the selloff in Chinese stocks was broad-based, with all 10 industries in the MSCI China Index declining the most in about 14 months. It is a stark difference from the previous trading day. On Friday the index was close to reaching a new all-time high.
Investors are in two camps when it comes to the selloff in Chinese stocks: some think it represents a buying opportunity, while others are concerned about more crackdowns. They point to increased regulation of internet companies, commodities producers, and the real estate sector.
With the Chinese government clamping down on various industries, particularly ones which get foreign attention and investment, Wall Street is spooked. Whether fears last largely depends on the fallout from the regulatory crackdown on Monday and in recent weeks.
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Cloud Computing Market Competition Intensifies
Companies Hold More Clout
Amazon (AMZN) and Microsoft (MSFT) have long dominated the cloud-computing market, but this is slowly changing. With rivals going after the two incumbents, companies are realizing they have more power. As a result they are splitting up contracts among more than one cloud provider and demanding better pricing, which is spurring competition and providing opportunities for the likes of Oracle (ORCL), Alphabet’s Google (GOOGL), and International Business Machines (IBM).
Take Experian (EXPGY), the credit rating company, for example. It has been using Amazon Web Services since 2014 but also tapped Microsoft, Google, and Oracle for some of its cloud computing needs. AT&T (T) is also spreading its business among more than one cloud vendor.
Cloud Computing Demand Surges
Companies’ newfound leverage with the cloud providers comes as spending on cloud services is growing at double-digit rates. In 2021 it hit $59.2 billion—up 32% year-over-year. It is forecasted to reach $106.8 billion next year. The pandemic drove increased adoption last year as companies shifted to remote workforces amid restrictions.
It is not only corporate customers which are spreading their cloud computing needs across multiple vendors. The government, which has been known to ink long-term deals with single vendors, is rethinking that strategy as it modernizes its aging systems. Take the Pentagon’s $10 billion, ten-year contract it originally awarded to Microsoft. Earlier this month it scrapped that contract and gave it to multiple vendors.
Amazon, Microsoft Still the Leaders
Amazon and Microsoft are seeing increased competition but the two remain the undisputed leaders in the cloud market. Even if the contract is spread among several vendors, Amazon and Microsoft typically still get a slice. When Amazon reports second-quarter earnings later this week, Wall Street expects its cloud unit to see 30% growth compared to last year. Microsoft’s Azure cloud business is expected to see 40% quarterly sales growth.
The cloud computing market has changed over the years. While Amazon and Microsoft are still in the lead, rivals are circling. It will be interesting to see how the industry shakes out as demand for cloud computing services explodes.
Retailers Looking for a Lift
The Back-to-School Bump
The back-to-school shopping season is forecast to be the biggest ever, as children return to the classrooms after more than a year of lockdowns and restrictions. That bodes well for some of the nation’s retailers including Target (TGT), Urban Outfitters (URBN), American Eagle Outfitters (AEO), and Dicks Sporting Goods (DKS). Many need an extra boost to keep their share price momentum going.
There are a lot of reasons for retailers to be optimistic. A recent survey showed families are expected to spend 16% more on back-to-school shopping. Spending amounts typically increase 1% to 3% year-over-year. The pent-up demand from the pandemic is driving the increase but so is the extra cash households are getting from the government. The expanded child-tax credit started hitting bank accounts on July 15, with the monthly payout increasing $83 a month per child.
Retailers Face Tough Comparisons
Retail stocks have been gaining this year as pandemic restrictions ease and the economy reopens, outperforming the S&P 500. Companies like Target and Dicks Sporting Goods saw strong sales during last year’s summer months, which sets up tough comparisons this season. Without back-to-school sales, it could prove difficult to meet and beat the high bar set in 2020. But a big back-to-school shopping season could potentially help keep the momentum going.
Department stores and specialty retailers such as American Eagle face easier year-over-year comparisons but investors still expect a strong showing nonetheless. Analysts are forecasting sales at American Eagle and Urban Outfitters to increase 15.2% and 11% respectively when compared to pre-pandemic results.
Earlier Shopping Period
This year’s back-to-school selling season may peak sooner than in years past given the pent-up demand. If consumers learned anything during the pandemic, it was to get their hands on supplies quickly. To avoid any shortages families are beginning to shop for back-to-school supplies and clothes in July instead of August. That means retailers which have fiscal second quarters ending in July or the beginning of August could see an early benefit.
Schools across the country are reopening for in-person learning, which means families have a lot of shopping to do. It will be interesting to see which retailers stand out.