Impact of Falling Chinese Stock Market on Domain Names
There is quite a bit of instability in the world markets right now. Outside of the US, one of the biggest markets for domain names during the past several years has been China. The Chinese stock market has grown at a tremendous rate, and similarly, the value of Chinese-favored domain names like short numeric and acronym .com domain names have grown as well.
Gone are the days when the worst 3 letter .com domain names would sell for $3,000 +/-. Now it’s more like a $10-15,000 floor for any 3 letter .com domain names, regardless of the letters. Short numeric domain names are selling for more than I’ve ever seen them. To me, it seems that investors have been paying more for many of these domain names than end user buyers are willing to pay.
I have been reading reports about the Chinese stock and financial markets falling of late. I reached out to several industry brokers to see how they think the domain market will be impacted if the Chinese stock market falls. Specifically, I asked about the “impact a major correction in the Chinese stock markets might have on domain names being sold to Chinese buyers (primarily short 2-4 letter and 2-4 number domain names).”
Several domain brokers from some of the most successful domain brokerages replied to my query, and their replies are below. I also invite you to share your thoughts in the comment section.
Andrew Rosener, Media Options:
If anyone knew exactly how the correction in the Chinese stock markets would impact the domain market they would be extraordinarily wealthy and have no need to comment in this blog! The fact is that neither the domain market nor the stock market has ever seen such volatility or trading volume ever before in history. Never. We can not look to history to predict the outcome. It’s unprecedented. Ultimately, the unwinding of the stock market could go both ways for domain names. On the one hand, Chinese investors have been consistently making well above average returns from their stock investments over the last years. This has made many investors very wealthy and that new wealth is going to need a place to invest. Chinese real estate is also in the midst of a bubble and controls have been put in place to prevent that bubble from getting bigger, limiting the number of investment properties investors can buy. That leaves mostly alternative investments such as art, wine & domain names, just to name a few. This could in essence drive the domain market to new heights, specifically the domains which are attractive to Chinese investors such as 2-4 letters & 2-5 numbers.
On the other hand, it seems that central banks will begin unwinding the cheap and easy capital policies that have been in place since as early as 2008 when the global financial crisis started. That includes increasing interest rates which may in fact make cash deposits more attractive as a safe haven for one’s capital. In the event that investors feel more confident than at present in holding cash longer term, or more specifically, if cash looks more attractive or at least safer than domain investments, then we could see a significant flight of Chinese domain investors from the market and the “floor” prices which people have become so accustomed to over the last year or so could drop out.
What I think is important in one’s analysis is the underlying factors that have driven investors into the domain market in the first place. Over the last few years, many of the new breed of “startups” in China, the Unicorns as they are called in Silicon Valley, have looked beyond Chinese borders to other markets in order to further their rapid growth. Companies like Ten Cent, Alibaba, 500Wan & others. In order to reach these markets they needed a name, specifically a domain name, that was universal. A domain name that would not alienate their Chinese customers but would appeal to the Western world as well. These short domains fit the bill unlike any other possible domain name. Coincidentally, these short domains also fit in with the global trend towards a mobile internet. As I have said since many many years, there is no faster way to get someone on your website from a mobile device (or otherwise) than a 2 letter .com! 3 key strokes (there is a .com now on most mobile device touch screens) and done! Not even an app can beat that! There continues to be an exponential increase in the number of startups coming online, coinciding with the exponential increase in the number of consumers coming online. This trend will continue and as it does, the demand for these short domain names will also continue.
As happens in any market correction, panic ensues. With panic comes bad decisions. People will panic and they will run for cover. People will sell cheap. Investors will stand on the side lines paralyzed by fear. Fear of losing money. Fear of making the wrong decision. Fear of fear itself. The few well heeled and informed investors will be there taking advantage of the panic and buying up the good names at cheap prices. The rich will get richer.
Dave Evanson, Senior Broker and Lijuan Wang, Broker – China, Sedo:
We expect prices of 2-4 letter and 2-4 number domains to maintain values and even grow slowly despite the current Chinese Stock market correction. Importantly, the Chinese government supports a strategy or even a mandate dubbed “Internet Plus” signaling China’s increasing emphasis on the Internet including domain names. We believe many Chinese investors will disproportionately reallocate funds from stocks to domains. Also of note is a recent slowdown in the appreciation rate of pricing of 2-4 letter and 2-4 number domain names but we attribute this predominately to sellers opportunistically saturating the market based on recent impressive price increases. As with anything else, it comes down to basic supply and demand curves although global, government and policy issues are complicating projections and analyses.
Jeffrey Gabriel, Domain Name Sales:
The Chinese market, and their culture has always interested me. Long before three letters, or numbered domains took off. Statistics, human nature, and history are also three subjects I am always trying to learn more about as well. Here are some interesting facts:
1. The Chinese have used more concrete in the last 3 years than the US used in the entire 20th century.
2. In a 2 week span 2.8M new investors invested in the Chinese Financial Markets in March. 2/3 of these investors never attended or graduated from high school.
Sounds similar to the US Housing Bubble with first time home buyers, and unqualified buyers owning homes they could not afford. Sprinkle Greece on top of this and we have a recipe for disaster.
How many 2,3,4 letter or numbered domains are there that are interesting to Chinese investors looking for alternatives? Not many. Basic economic tells me that only a few investors can drive the market up, or down. I would advise my clients who own these types of domains to sell, and I would urge buyers looking to invest to patiently wait. We might not be at the height of the market, but it is coming. Like the housing market, beach front property, aka category killing domains will not get hurt value wise.
The funniest part of this entire exercise I probably would have said the same thing last year. This market never ceases to amaze me.
John Daly, NameConnect.com:
If you have been reading recent news global investors were preparing for a downturn in the Chinese market. This is not the first nosedive the index has seen, Chinese investors over the last twenty years have lost big time due to volatility and have come to treat the stock market as a side investment or hobby. This is shown in their investment style, they are prone to short term trades (a whopping 65% of investors trade once a month) which indicates more speculation rather than long term planning which then lends to instability.
There will be a short term hold on buying but once there is a sign of recovery purchasing of domains will come back full throttle. In part the reason you see so much interest coming from China is due to their seeking of alternate external investments, many do not trust the stock market to put a large enough portion of savings there. At least this is what I gather from reading reports and speaking with people in China.
Ryan Colby, Outcome Brokerage:
In September of 2013, I tweeted that I thought valuations in short, 2 – 4 letter and 2 – 4 numeric domains were hitting a top. As it turns out, that run up never stopped. Domains in this category have continued to skyrocket right alongside the hyper growth of the Chinese economy. Valuations in China are now higher than those in the U.S. at the peak of the dot com bubble. In fact, the average Chinese technology stock now has a P/E ratio 41% ABOVE that of U.S. peers in 2000.
Like Chinese equities, it seems that numeric domains have experienced the same parabolic rise. Unlike stocks and commodities which are backed by hard assets and easier to place a value on, domain valuations are primarily subjective in nature. This means that their value is pegged from the buyer, not the seller. In business, and in life, everything has a cyclical nature to it. While I’m not a market forecaster, I do know that not all assets continue to rise in the same direction forever and that is also true for domain names. The most concerning part of the current Chinese bubble is that a very high percentage of the traders are using a substantial amount of leveraged margin which is never a good thing.
The age old wisdom of buy low and sell high vs. buy high and sell higher (or to the next idiot) is still applicable. I believe a correction in the Chinese markets could bring prices down below the levels we saw in late 2013.
Hobi Michalec, Domain Holdings:
Domains have proven themselves to be a reliable form of investment. When one form of investment dries up, i.e. the stock market, real estate, etc. Investors immediately shift to another.
Very recently (Past few days/week) NNN.com and NNNN.com domains are seeing a quick spike in value. Investors are shifting from one form of speculative investing (stocks) to another.
Taking from events in the recent past, domains, particularly numeric are a constantly appreciating asset. In most other forms of investment there are not such a finite number of assets. Assuming an immediate value drop will happen is operating with the assumption that you can just “make” more domains. (for sake of argument I’m referring to only .com)
These assets are few enough that I believe the current Owners will, as in the past just maintain possession of the domains which will ultimately help to keep their value consistent. This is to say that they are not able to sell them.
However, these assets are more in demand now than they were in the past.
2, 3, and 4 letter domains are similar but a bit different than numeric. The most apparent is there international appeal. Whereas numeric domains have a primary focus in China, alpa domains have global market ability and potential.
While there is significantly more supply for these type of domains there are many more consumers. I feel this helps to equalize it a bit. Obviously, some are much more valuable than others. Certain domains are sold solely on a liquidity basis deriving from a pattern in the domain or some other aspect. For example, VVV.com has virtually no meaning. However, a same character, three letter .com domain is exceptionally rare. As such it commands a unique price.
The numeric domains and alpha domain market carry many correlations.
In summary, I feel that the market will, at worst, become stagnant but not lose their value. I think we will see an overall increase in value with a focus on domains that are regarded as premium within China. Understand though that every domain is different and the market and value predictions for each domain is going to be also be different.
Giuseppe Graziano, GGRG.com:
As I am writing this today, the Shanghai composite index has already lost approximately 20% of its value within 2 trading days. That is one of the biggest losses of the second largest stock market in Asia that we have ever witnessed. At the same time, the Shenzhen composite index (similar to the Nasdaq’s – as it lists the youngest and hottest Chinese companies), lost almost 28% of its value from its peak of the 12th of June. How will this affect the prices if you own any liquid domains?
Looking at the history, the increase in demand for liquid domains by Chinese investors started in the beginning of 2014 – when the Shanghai composite index woke up after two years of bouncing around the 2,000 base points support, to rally in just 12 months up to 4,000 base points (10th April 2015). The index continued to go up until it reached the 5,000 base points on the 12th June. This trajectory is astonishingly close to what we have seen for the evaluation of liquid domains.
In the US, we know that the domain aftermarket is heavily influenced by the economy and the stock indexes, so much that, over time, the IDNX (an index that tracks the secondary market for domain names), has shown a very close correlation with the NASDAQ.
The reason for that is simple – the demand for premium domains is driven by tech companies and domain investors, who are parties more likely to pursue less conservative forms of investments.
On the other hand, in China, the demand for premium domains is more linked to wealth protection/portfolio diversification, just like investing in collectibles. A large percentage of the biggest Chinese Domain investors consider domains just a side investment and not as their main business. For most of them, liquid domains are considered almost a virtual currency – that can be easily traded, put under privacy, and, an important benefit, offers profits that are seldom taxed.
During the gambling crackdown of 2014 in Macau – Asia’s largest gaming hub, cash reserves simply migrated, and, curiously enough, Las Vegas’ revenues for “Chinese-friendly” games like baccarat almost doubled, as reported by one of my favorite financial blogs. If the same principle applies, the profits taken off the stocks table might have a good chance to be reinvested in different avenues – domain names being one of them.
Therefore, in case the 20% drop of the Shanghai Stock index is purely a correction (read: profit-taking), we are likely to see an increase in demand especially for the most premium assets like LL, NN and high-value NNN. If the Chinese stock market instead extends its fall over the next months, the demand for the lower tier (read: more accessible) assets like NNNNN, LLLL, 3C, etc, might be affected negatively because a lot of first-time investors could have less cash available.
For what I observed on the market over the past few days, there has been a slight uptick in bids from Chinese investors, and it does not look like there is any panic selling. For whoever is interested, I provide regular updates about the after-market on my weekly ggrg.com newsletter.
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