Chinese tech stocks have taken a hit since many hit all-time highs in early 2021, and the picture hasn’t improved much in 2022. That may be a compelling reason to at least take another look at this sector, according to
Regulatory pressures from both Beijing and Washington, which began in earnest in late 2020, have driven share prices in the industry inexorably lower, with
(tick: BABA) lost almost half of its market value last year alone. The picture isn’t much better for peers like
This year’s selloff in stocks—amid hot inflation, rising bond yields and the risk of a recession—has only compounded the headache for investors.
But this is a tough time for markets in general. Global bonds are in their first bear market in a generation, with crude oil down 20% in the past three months amid high volatility and strong cap funds such as
( GOOGL ) are flirting with deep double-digit year-to-date declines.
Goldman Sachs expects market volatility to continue and does not rule out a recession within the next year. Sharmin Mossavar-Rahmani — who leads the bank’s investment strategy group and is the chief investment officer of the consumer and wealth management division — stuck to her guns about where it’s safest.
“We still think US equities are the best place to pilot through these treacherous waters,” Mossavar-Rahmani told a media roundtable. last friday
The bank does not recommend that clients go overweight in other markets, but Mossavar-Rahmani added that Goldman likes Eurozone banks—and has even traded in the Chinese tech sector.
Senior investment strategist Matheus Dibo describes a trade using stock options. The game involves the use of a spread call, in which options are used to take advantage of the upside of a stock that is rising in price, while limiting the downside by not actually owning the stock.
“The uncertainty is so high, whether it’s domestically from all the regulations or even overseas with the SEC audit issue,” Dibo said. “Having said that, we think this area has been hit hard.”
These regulatory pressures will not be unfamiliar to investors in Chinese tech stocks.
and its ilk have faced tough rules on data security and competition as President Xi Jinping has tightened control over the country’s economy.
Abroad, a rift over accounting rules between Chinese authorities and the Securities and Exchange Commission has raised the risk of a forced delisting for US-listed Chinese tech stocks. Although progress has been made in terms of control rules, it is not complete and this remains a significant risk.
“There’s a lot of bad news in this area,” Dibo said. “I think the scope for disappointment in the future is much less.”
After all, valuations have fallen significantly across the sector, the investment strategist said – with current prices down more than 70% from their February 2021 highs and many trading 40% below their March pandemic peaks 2020.
“There are some things that could drive this sector higher just because there is so much negativity,” the investment strategist said.
First, despite the fact that the latest quarterly earnings season revealed a painful economic hangover from China’s deterrent Covid-19 lockdowns, tech companies still beat the Street’s sales expectations by 6% and earnings estimates by 21%. They are doing relatively well.
Goldman will also keep a close eye on auditing rules, with the Accounting Firm Supervisory Board currently in China facing the first wave of revisions under a new deal. The next National Congress of the Chinese Communist Party – which will be held in October – is another potential catalyst, with Dibo noting that the event could see new related announcements linked to the sector.
And then there’s Singles Day — an e-commerce holiday in China that could be a breakout year this year in terms of online sales that could turn the tables on the upcoming earnings season.
“But that doesn’t change the structural view on China, which remains much more cautious,” Dibo said. “Investors haven’t really been rewarded for investing in Chinese stocks, despite the spectacular growth you’ve seen in the economy over the last few decades.”
Write to Jack Denton at firstname.lastname@example.org