China’s big tech is becoming the target of investors who fear missing out
(Bloomberg) — What do you do when China’s fast-moving markets give investors a taste of the rebound they’ve been yearning for? Buy the nation’s battered tech stocks.
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Big Tech is the most favored Chinese sector by institutional and retail respondents in the latest MLIV Pulse survey, with 42% of 244 investors also saying they plan to increase their exposure to the country over the next year. .
Fall for the fear of missing something. The greater the gap between the stock price and metrics like earnings and sales, the greater the potential for gains when good news arrives, the logic goes. It’s playing out this month amid signs that China may have started to move away from its Covid-Zero policy, with widely followed stocks like Alibaba Group Holding Ltd. posting intraday increases of 20%.
There is plenty of room for a rebound. The Hang Seng Tech Index and the Nasdaq Golden Dragon China Index of U.S.-listed companies are down around 70% since peaking in February 2021. That’s worse than any of the 92 benchmarks tracked. by Bloomberg. In September alone, the funds sold $33 billion worth of Chinese tech stocks, according to a recent note from Morgan Stanley quants.
To be clear though, nothing fundamental has changed for the tech industry. There is little evidence that President Xi Jinping will backtrack on his campaign to rein in the country’s tech giants, and efforts to prevent Chinese stocks from being delisted from US stock exchanges are progressing slowly. Lockdowns in key cities like Guangzhou serve as a reminder that the determination to stamp out Covid-19 continues to stifle consumption and hammer the economy.
But when Chinese markets recover, they do so with flying colors. Short hedging and continued momentum have been the main drivers for the country’s equities over the past three weeks, as mainland-based investors have also done well in Hong Kong. It is even then that big names like Tiger Global Management are throwing in the towel on China and reducing their allocations.
It is not surprising that stocks can be considered cheap. The Golden Dragon Gauge trades at less than 15 times its members’ projected earnings, a 34% discount from its 10-year average. Investors will get more clarity on the health of Chinese companies in the coming weeks, with indicators like Alibaba, JD.com Inc. and Pinduoduo Inc. due to report results.
Nearly half of market participants who responded to the survey expect U.S.-listed Chinese stocks to recoup some of the losses by the end of the year. Less than a fifth of them have seen their decline continue. Markets are underpricing a potential exit from Covid Zero, according to 48% of respondents. Some 46% said markets were too excited about reopening.
Beijing’s virus containment policy is seen as both the biggest potential catalyst for gains and a major risk to Chinese markets next year, underscoring how central it has become to the outlook. Goldman Sachs Group Inc. says the reopening would lead to a 20% gain in Chinese stocks.
In a potentially telling development, China last week scrapped quarantine for incoming travelers and scrapped the so-called circuit breaker system that penalizes airlines for bringing virus cases into the country. The new Politburo standing committee recently said the country should stick to the Covid Zero policy, but officials also needed to be more targeted with their restrictions.
High interest rates will be the main risk for international financial markets next year, according to a majority of investors, followed by a slowdown in China. A global recession was also among the concerns cited by respondents.
MLIV Pulse is a weekly survey of readers from Bloomberg’s professional service and website. The last survey was conducted from November 7 to 11.
For more market analysis, see the MLIV blog. To subscribe and see previous stories from MLIV Pulse, click here.
–With the help of Kasia Klimasinska.
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