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Should I be wary of NIO shares amid the Chinese debt supercycle?

Young Asian woman with head in hands at her desk

NIO (NYSE:NIO) shares are among the most volatile stocks I’ve come across. Just three weeks ago the stock surged above $15, with some forecasting it would push as high as $20 in the same rally. However, today it trades for just $10.55.

Market forces

The trajectory of a stock’s movement can often be as heavily influenced by broader market forces as it is by the company’s own earnings performance. In fact, the intricate interplay between external market dynamics and a company’s financial results is a defining feature of the stock market landscape.

Factors such as economic indicators, geopolitical events, industry trends, and investor sentiment can collectively exert a powerful gravitational pull on a stock’s direction, often overshadowing the company’s individual earnings achievements.

Debt on the agenda

The health of the Chinese economy is once again on the top of the agenda. While China’s economy has shown cracks for a while, its health became front page news again after one of its largest property developers, Country Garden, missed interest payments on dollar bonds earlier in the month.

Unless the interest is paid to bond holders within the grace period, Country Garden could default. This, in turn, has the potential to amplify apprehensions surrounding China’s property market, a sector that constitutes a significant 25% of the country’s GDP.

The ripple effect could extend to broader economic implications, warranting a closer scrutiny of the situation’s possible ramifications.

What does this mean for NIO?

While many aspects of China’s economy have concerned investors, analysts, and even Joe Biden, the green tech sector has grown exponentially in recent years. NIO is among a host of EV companies that were on impressive growth trajectories before the pandemic.

NIO remains a hugely exciting company, constantly innovating and expanding its premium range of EVs. However, it’s Tesla-esque growth trajectory was cut short by Chinese lockdowns. NIO and its peers evidently lost ground on Tesla.

So, what does this mean for NIO?

Well, we know demand is already soft within the economy as a whole. And that’s been filtering through the EVs too. Chinese economic data indicates a notably slow recovery post-lockdown, falling short of earlier expectations.

A recent announcement, confirming this trend, sparked a sell-off in Asian equities. This is evident when looking at NIO’s share price, which shed a third of its value in three weeks. The stock looks cheap once again, trading at 2.4 times sales versus Tesla at 7.6 times.

The issue is that there could be more downside if concerns spread.

Still very promising

As some traders have pointed out, NIO has fallen back into the range of its previous holding pattern. Over the past year, the stock has consistently fluctuated within the $7 to $12 range. Surpassing this established trend line could prove to be challenging.

However, while the share price could push downwards again in the coming months, offering more attractive entry points, it’s still a very promising growth stock. I say this based on its range of products, industry-beating performance, use of innovative tech, and swappable batteries.

Investors, however, may wish to proceed with caution as clouds gather over China.

The post Should I be wary of NIO shares amid the Chinese debt supercycle? appeared first on The Motley Fool UK.

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More reading

  • Are NIO shares a hidden gem in the electric vehicle space?
  • NIO stock is on fire! Should I buy while it’s under $15?

James Fox has no positions in any of the stocks mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.