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 could be a compelling reason to at least take a fresh look at this sector
Regulatory pressures from both Beijing and Washington, DC, which began in earnest in late 2020, have relentlessly driven stock prices in this sector lower
(Ticker: BABA) lost almost half of its market value in the past year alone. The picture is not much better for peers
This year’s stock sell-off – amid red-hot inflation, rising bond yields and recession risk – has only added to the headaches for investors.
But this is a difficult time for markets in general. Global bonds are in their first bear market in a generation, crude oil is down 20% in the last three months amid skyrocketing volatility, and megacap stars are liking it
(GOOGL) is flirting with deep double-digit annual declines.
Goldman Sachs expects market volatility to persist and does not rule out a recession within the next year. Sharmin Mossavar-Rahmani — who heads the bank’s investment strategy group and is chief investment officer of the consumer and wealth management division — stuck by her opinion on where it’s safest.
“We still believe US equities are the best place to navigate these treacherous waters,” Mossavar-Rahmani said at a media roundtable last Friday.
The bank doesn’t advise clients to go overweight in other markets, but Mossavar-Rahmani added that Goldman likes eurozone banks — and has even traded in the Chinese tech sector.
Lead investment strategist Matheus Dibo outlines stock options trading. The game involves using a call spread, using options to take advantage of the upside of a stock that is rising in price while limiting the downside by not actually owning the stock.
“There’s just so much uncertainty, whether it’s domestically with all the regulations or even overseas with the SEC audit issue,” Dibo said. “Nevertheless, we believe that this sector is badly hit.”
This regulatory pressure will not be unknown to investors in Chinese tech stocks.
and its competitors faced strict rules on data security and competition as President Xi Jinping increased his influence over the country’s economy.
Abroad, a dispute over accounting rules between Chinese authorities and the Securities and Exchange Commission has increased the threat of forced delistings for US-listed Chinese tech stocks. While progress has been made on auditing rules, this is not a done deal and this remains a significant tail risk.
“A lot of bad news is priced in in this sector,” Dibo said. “I think there’s a lot less room for disappointment going forward.”
Finally, valuations in the sector have fallen significantly, the investment strategist said — with current prices down more than 70% from their February 2021 highs and trading many 40% below their peak lows during the March 2020 pandemic.
“There are a few things that could propel this sector higher just because so much negativity is priced in,” the investment strategist said.
For one, tech companies are still beating The Street’s sales expectations by 6% and earnings estimates by 21%, despite the latest quarterly earnings season revealing a painful financial hangover from China’s disruptive Covid-19 lockdowns. They are doing relatively well.
Goldman will also be closely monitoring the back-and-forth over audit rules, with the Public Company Accounting Oversight Board currently in China tackling the first wave of reviews under a new agreement. The next Chinese Communist Party National Congress – to be held in October – is another potential catalyst, with Dibo noting that the event could include new relevant announcements related to the sector.
And then there’s Singles Day — an e-commerce holiday in China that could be a game changer this year when it comes to online sales, which could change the dial for the upcoming earnings season.
“But that doesn’t change the structural view on China, which remains significantly more cautious,” Dibo said. “Investors really haven’t 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